Basic Overview
The US dollar has been steadily rising against most major currencies over the past two weeks, although the catalyst behind the move has been unclear. A good argument has been that most of the moves we have seen have been driven by debt relief as a result of the strengthening yen.
Essentially, the carry trade pressure has had an impact on all other markets. Given the size of the recent yen rally and the correlation with many other markets, it seems that this may have been the cause. It will be interesting to see how things develop in the coming days now that the BOJ decision is in the rearview mirror and whether this correlation fades.
From a monetary policy perspective, nothing has changed as the market still expects at least two rate cuts by the end of the year and sees some chances for two consecutive cuts in November. Today, we will also see the Federal Open Market Committee’s interest rate decision where the Fed is expected to keep rates steady and signal a rate cut in September.
Data continues to suggest that the US economy remains resilient with inflation slowly coming back to target. Overall, this should continue to support the soft landing narrative and be positive for overall risk sentiment.
On the other hand, the British pound has been supported against the US dollar in recent months mainly due to risk appetite, although recent events with the yen have strengthened the US dollar against several major currencies.
On the monetary policy front, the market is pricing in a 60% chance of a Bank of England rate cut tomorrow, although recent data has been disappointing for the central bank, with UK CPI figures unchanged from the previous month and the labour market report showing wage growth remaining at elevated levels.
GBP/USD Technical Analysis – Daily Time Frame
GBPUSD Daily
On the daily chart, we can see that the GBP/USD pair has dropped below the key 1.29 level and extended its losses as sellers have increased their buying interest. A natural target is expected to be the major trend line around the 1.2780 level where we can expect buyers to step in with risks set below the trend line to pave the way for a rally to a new cycle high.
GBP/USD Technical Analysis – 4-hour time frame
GBPUSD 4 hours
On the 4-hour chart, we can see that we have a slight bearish trend line that defines the current bearish momentum. Sellers are likely to continue relying on it to take another bearish stance, while buyers would like to see the price break the trend line and the 1.29 level to record new highs.
GBPUSD Technical Analysis – 1-Hour Time Frame
GBPUSD 1 hour
On the 1-hour chart, we can more clearly see the recent price action with the trend line acting as resistance. A break above should give buyers more confidence to push to new highs, but a break above the 1.29 level should give them even more confidence. The red lines mark the average daily range for the day.
Upcoming incentives
Today we have the US ADP report, the US Employment Cost Index and the FOMC decision. Tomorrow we have the Bank of England decision, the latest US jobless claims data and the US ISM manufacturing PMI. Finally, on Friday we close out the week with the US Non-Farm Payrolls report.