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The GBP/USD currency pair has been trapped within a broad range for months, but when you drill down and look at the short-term price action and see what is driving some of its recent price movements, you can see there is a lot more to the cable story than meets the zoomed-out eye.
There are several drivers of the price of the GBP/USD currency pair, which is groping for a more solid direction. It is not clear that this direction has been found yet, but the Bank of England meeting happening today is likely to provide some clarity, while yesterday’s “hawkish hold” by the US Federal Reserve is likely to give some answers on the Dollar side that the market might run with.
Why GBP/USD Matters After the Fed and BOE Meetings
Most of what makes the GBP/USD most interesting this week is the fact that both central banks relevant to this currency pair – the US Federal Reserve and the Bank of England – have held or are holding policy meetings. Turning to the Fed first a few hours ago, the FOMC surprised by coming close to hiking its already relatively elevated its interest rate by 0.25% - voting was more hawkish than was expected. The CME FedWatch tool now shows markets are pricing in a 65% chance of a 0.25% rate, which was lower before the Fed meeting.
There is not much speculation over the Bank of England’s meeting today, with markets pricing in an overwhelming probability (>90%) that its interest rate will be held. However, it is possible that the vote totals might be a little different than expected, and that plus the Monetary Policy Summary will be closely watched and could to some extent shift the market’s take on the Pound.
GBP/USD Technical Outlook: Key Levels at 1.3340 and 1.3400
Recent hours showed a strangely counter-intuitive technical development: the Fed’s announcement of its “hawkish hold” sent the price of this currency pair shooting higher, rising by about 65 pips within only one hour, when the news might have logically expected to send this pair lower. This suggests that there were some institutions controlling large trades who had expected the Fed to go ahead and make that hike, not just make it certain at the September meeting, and these institutions likely bought accordingly. What is even more interesting is that these positions have still not been unwound, we have seen a small bearish retracement to a new support level at $1.3340. From there the price is rising again as we approach the London open.
This bullish price again is reinforced by the three closely packed support levels we see between the round number at $1.3300 and the nearest support level at $1.3340. Zooming out a little, there is another bullish reinforcement: the price passively broke out of a significant descending price channel at the start of this week.
The challenge for bulls will be getting established above the resistance at $1.3389 which has continued to hold for another week. If the price can get established above $1.3400, this will show bulls are more solidly in control, and will likely attract more buyers into the market.
GBP/USD Price Chart
Hidden Risks and Blind Spots in the GBP/USD Rally
Forex analysts like me often make a particular mistake that I might be guilty of now – putting too much faith in technical analysis and interest rate differentials, when the Forex market is often driven instead by a need to exchange one currency for another in enormous quantities for reasons not fully know. This counter-intuitive upwards move might not be because institutions were privately seeing more than the wider market’s priced in 31% probability of a Fed rate hike yesterday. It is possible that institutions just needed a lot of British Pounds and that was either coming from US funds or from other currencies which had to cross through USD to become GBP. Still, I doubt this, because the spike is holding and support levels are coiling below, which suggests something more solid is going on.
What Could Still Push GBP/USD Lower from Here
I have painted a bullish picture, but what if I am wrong? More importantly, what will need to happen to make it obvious that I am wrong?
Firstly, the resistant area at $1.3389 / $1.3400 might continue to hold over another test or two from below. If the price just cannot get established above that level, it will have to go somewhere. Even if it won’t be a strong fall, we could see a choppy drift down to lower levels.
Looking at the US Dollar Index, which has fallen just as strongly as the GBP/USD has risen today, we can see this is much more about the US Dollar than the British Pound. Given such a firm drop by the greenback even after a hawkish hold, it is clear to see that sentiment will have to change on the USD in a big way, and even a hike in September seemingly is not going to change that.
Where Next for the GBP/USD?
While it is important to be open to all possibilities, the dissonant weakness in the US Dollar strongly suggests higher prices. I think the question is just going to be whether the price can break above $1.3400. That is the line in the same to watch for the best clue as to where the next significant directional move is most likely to happen.
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