British Pound (GBP) Forecast: Cable Braces Leading up to FOMC

[MongiIG]

GBP/USD ANALYSIS

• Cable hovers around 1.2494 ahead of Fed rate decision.
• BoE in focus tomorrow.

 

CABLE FUNDAMENTAL BACKDROP

Pound sterling is very much at the mercy of the dollar today with the Federal Reserve interest rate decision scheduled later today (see economic calendar below). The Bank of England (BoE) will be closely scrutinizing the Fed comments post-announcement with their rate notice in focus tomorrow.

GBP/USD ECONOMIC CALENDAR

Source: DailyFX Economic Calendar

Money markets are currently pricing in a 50bps hike by the Fed with almost 100% certainty (refer to table below). The 75bps figure is unlikely but may present itself in future meetings. That being said, the dollar is on a solid grounding relative to the pound – reflective by the divergence between central banks respectively. The U.S. economy seems to be in a more suitable condition to withstand such aggressive tightening while the UK lags slightly behind with the Russia/Ukraine conflict continuing to have spillover effects on the UK.

Lack of confidence by global markets within the European region coupled with the recent slump in Chinese forecasts have given the USD more traction as an attractive investment.

FED INTEREST RATE PROBABILITIES

Source: Refinitiv

GBP/USD TECHNICAL ANALYSIS

GBP/USD DAILY CHART

Chart prepared by Warren Venketas, IG

On the technical side, the daily GBP/USD chart above looks to be stretched on the downside with the RSI lingering in oversold territory. Cable is currently flirting with the key 1.2494 61.8% Fibonacci level, and could be a matter of time before we see a confirmed break below towards the June 2020 swing low at 1.2252.

Divergence from the EMA’s and 200-day SMA confirms this strained bearish outlook but fundamentals look to additional pound weakness unless Fed or BoE expectations change.

Key resistance levels:

• 1.2615
• 1.2494 – 68.1% Fibonacci

Key support levels:

• 1.2252

MIXED IG CLIENT SENTIMENT

IG Client Sentiment Data (IGCS) shows retail traders are currently LONG on GBP/USD, with 81% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however, due to recent changes in long and short positioning we arrive at a cautious sentiment bias.

 

May 4, 2022 | DailyFX
Warren Venketas, Analyst