Bullish view
- Buy the GBP/USD pair and set a take-profit at 1.2700.
- Add a stop-loss at 1.2480.
- Timeline: 1-3 days.
Bearish view
- Set a sell-stop at 1.2500 and a take-profit at 1.2400.
- Add a stop-loss at 1.2600.
The GBP/USD exchange rate drifted downwards after the weak UK GDP data and the Federal Reserve decision. The pair retreated to the key support at 1.2500, as traders anticipate a more dovish Bank of England (BoE).
Bank of England decision ahead
The GBP/USD pair retreated after data revealed that the British economy contracted in October. According to the Office of National Statistics (ONS), the economy contracted by 0.3% as woes in the services, manufacturing, and construction sectors continued.
These numbers came a day after another report showed that wage growth in the country weakened in October. Most importantly, they came as the BoE was starting its two-day monetary policy meeting.
Economists expect that the bank will leave interest rates unchanged at the 15-year high of 5.25%. They also expect that it will consider cutting them in 2024 in a bid to stimulate the economy.
The challenge is that inflation remains stubbornly high. The most recent data showed that the headline Consumer Price Index (CPI) dropped to 4.7% in October, more than double its target of 2.0%.
The GBP/USD pair also retreated after the Federal Reserve delivered its final decision of the year. As was widely expected, the committee left interest rates unchanged between 5.25% and 5.50%.
In a statement, Jerome Powell, the head of the bank, warned that inflation remained at an elevated level. Therefore, he pushed back against hopes of rate cuts in the first half of 2024. Some analysts were pricing in a 0.25% rate cut in its meeting in March. Still, the bank sees about three cuts in the second half of the year.
With the Fed’s meeting done, the upcoming US retail sales numbers will have no impact on the greenback. Economists polled by Reuters expect the data to show that core and headline retail sales dropped by 0.1% in November.
GBP/USD technical analysis
The GBP/USD pair peaked at 1.2732 in November and retreated to the key support at 1.2500. On the 4H chart, the pair has formed a falling wedge pattern, which is one of the most popular bullish signs.
The pair also formed a bullish flag pattern and has moved to the 23.6% Fibonacci Retracement level. It is also attempting to move above the 50-period Exponential Moving Averages (EMA). The Relative Strength Index (RSI) is pointing upwards.
Therefore, the pair will likely continue rising as bulls attempt to retest the psychological point at 1.2700. However, it could be highly volatile ahead and after the final Bank of England decision of the year.
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