- At the beginning of this week's trading, the price of the GBP/USD currency pair completed the downward correction path, with stronger losses that affected the support level 1.2797, the lowest for the currency pair in two weeks, and stable near it at the beginning of today's session, Tuesday.
- Despite the performance, there may be an opportunity for the currency pair to increase volatility and a possible retest at the psychological resistance at 1.30 or more if the US Federal Reserve halts the path of raising US interest rates or eases its hawkish policy stance.
- However, the biggest risk is represented in the losses that lead to the return of the pound to below the 1.28 support.
The decline in British inflation led to a decline in the performance of the pound against many other currencies last week, including the rebound of the US dollar, while leaving it to test a pair of technical support at 1.2825, as the pound entered into the face of basic risks at the beginning of this week's trading. The results of the S&P Global PMI survey warned of a sharp slowdown in the manufacturing and services sectors for July and put sterling under pressure, but policy decisions from the US Federal Reserve and the Bank of Japan on Wednesday and Thursday are likely to be more decisive on how the week ends.
An ANZ Bank analyst said thar “We expect the FOMC to raise US interest rates by 25 basis points when it meets this week, with the target range for the fed funds rate raised to 5.25-5.50%. This should bring it in line with our expectations for the final interest rate. There are encouraging signs that price pressures are abating, but it is not clear that this is enough to return inflation to 2% sustainably. As such, there is a risk that the Fed's work is far from over.”
Economists, analysts, and financial markets all expect the Fed to raise interest rates from 5.25% to 5.5% tomorrow, Wednesday, and so will not be prepared for any sudden decision to delay longer before raising borrowing costs again, while the pound may also be sensitive to any second guess on the outlook released in June.
An update of expectations last month indicated that the federal funds rate is likely to peak at 5.75% by the end of the year and close to the level that triggered the collapse of some small and medium-sized banks in March when financial markets first began pricing in such a possibility. Interest rate markets have stalled out from full pricing in the new forecasts since they were issued last month, and since then US inflation has reportedly eased to 3% in June, bringing it close to the 2% target and perhaps giving way to the Fed's patience before raising borrowing costs again.
Overall, GBP/USD could benefit usefully tomorrow Wednesday if the Fed chooses to leave the US interest rate unchanged for the second month in a row or otherwise indicates that the June outlook is less confident now than it was then, but risk aversion in global markets and heavy losses for the pound could be seen instead if the bank continues on the June path this week. A further rally on Thursday could also be encouraged if the Bank of Japan surprises the market with yet another unexpected adjustment to the parameters of its yield curve control program and its cap on 10-year government bond yields, the risks of which some say are underappreciated.
GBP/USD Technical Outlook
According to the performance on the daily chart below, the price of the GBP/USD currency pair is closest to breaching the psychological support level at 1.2800, which may increase the control of the bears and turn the trend into a strong bearish one.
Therefore, stronger support levels are expected, and the closest to them will be 1.2735 and 1.2600, respectively, and the last level is sufficient to push the technical indicators toward strong oversold levels. On the other hand, and for the same time period, there will be no chance for an upward correction without stability above the psychological resistance at 1.3000 again. The dollar will be affected today by the release of the US Consumer Confidence reading.
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