Currency

GBPUSD Could Struggle as Rate Setters Convene

British Pound Forecast: Bearish

  • Sterling is underpinned by the idea that, whenever UK rates go lower, it will be after the US
  • Still, surprisingly vigorous US inflation has the market wondering about when the Fed will move
  • This week will bring policy decisions from central banks on both sides of GBP/USD

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The British Pound remains close to the seven-month highs against the United States Dollar hit earlier in March even as it drifts with understandable caution into a new trading week packed solid with central bank event risk.

Sterling was hit as were most currencies by a surprise increase in US producer prices and the inevitable knock-on re-think about whether it’s soon enough to declare inflation beaten and cut interest rates. The market has already seen expectations of when the Federal Reserve might start to trim borrowing costs pushed back this year. The current favored moment, June, is now under the spotlight.

The Fed will give its March interest rate decision on Wednesday and so high are the stakes that we can probably expect fairly torpid trade across the foreign exchange world until its been heard from.

The Bank of England goes just a day later, on March 21. Its previous Monetary Policy Committee meeting ended with rates left alone, and the same result is expected this week. While inflation is certainly far below its terrifying peaks, wage settlements remain extremely punchy and the BoE’s plea for more time to assess the situation is likely to be repeated.

Much may depend on official UK February inflation data, released this week a day before the MPC makes its call. Headline inflation is expected to have relaxed to 3.6% on the year, from 4% in January. This would mark another two-year low, cement a clear downtrend, and keep rate-cut hopes very much alive. Sterling markets will be very keen to see if last month’s three-way split on the nine-member panel is repeated. Back in February one voter wanted to cut rates, two wanted to raise and six wanted them left alone.

For now the Pound is supported by the idea that, whenever the BoE does decide to move, it will be after the Fed. Clearly, anything that causes the market to rethink what might happen in the US tends to send GBP/USD lower, but that backdrop looks set to endure. There is however some chance that the Fed will sound more cautious than the market would like this week, which might make progress for Sterling bulls tougher. Based on that likelihood, it’s a mildly bearish call this week.

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GBP/USD Technical Analysis

GBP/USD Daily Chart Compiled Using TradingView

The Pound has nosed above its previous broad range top of 1.28302, but hasn’t done so with any conviction and soon settled back below that level which, again, provides resistance. Within that range, the most recent uptrend from February 15 remains well below the market, offering support at 1.26602. The fundamental picture suggests a meander higher for the Pound and the technical picture would appear to back that up too.

GBP/USD currently struggles with selling pressure on any approach to the psychological 1.28 resistance area, even though they tend not to push it down too far. A durable break above that point would be a very bullish signal and put the significant peaks of last July back in focus.

Retracement support at 1.24916 continues to underpin this market, although it hasn’t been tested since December.

–By David Cottle for DailyFX


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