While the overall outlook for the pair is bearish, we can’t rule out a situation where the pair bounces back as traders fade the dollar rally.
- Set a sell-limit at 1.4037 and a take-profit at 1.3960.
- Add a stop-loss at 1.3950.
- Timeline: 1-2 days.
- Set a buy-stop at 1.4050 and a take-profit at 1.4120.
- Add a stop-loss at 1.4000.
The GBP/USD pair crashed after the latest Federal Reserve interest rate decision. The pair declined to 1.3970, which was 1.15% below the highest level yesterday and 1.80% below the year-to-date high.
Fed Turns Hawkish
The biggest catalyst for the GBP/USD was the Federal Reserve interest rate decision that was delivered on Wednesday. In it, the bank decided to leave interest rate and quantitative easing unchanged as most analysts were expecting. The bank also changed its tone on future rates and tapering.
The closely-watched dot plot showed that the Fed will make its first interest rate hike in 2023, earlier than in 2024. Seven members of the committee saw the need to increase rates by the end of 2022, up from four in the previous meeting.
Similarly, the Fed started the discussion of ending the tapering process. Tapering is the process where the bank starts winding down its $120 billion-per-month asset purchases that have pushed its balance sheet to almost $8 trillion. The timing of this tapering is unclear but there is a possibility that the Fed will issue forward guidance to avoid a return of the infamous taper tantrum.
GBP/USD traders are now focusing on the Bank of England (BOE) that will hold its next meeting next week. This meeting comes at a time when data from the UK have been relatively strong. On Wednesday, data showed that the headline Consumer Price Index (CPI) rose to the BOE target of 2% for the first time in more than a year. This increase was led by clothing and second-hand clothes. Data released earlier this week also showed that the unemployment rate declined to 4.8% in April.
Later today, the GBP/USD pair will react to a speech by Fed Chair Jerome Powell and the initial jobless claims numbers.
GBP/USD Technical Analysis
The GBP/USD pair declined sharply after the FOMC decision. On the four-hour chart, it managed to move below the important support at 1.4083, where it had struggled to move below before. It also moved close to the 50% Fibonacci retracement level. The pair declined below the 25-day and 15-day exponential moving averages while the Relative Strength Index (RSI) has formed a bearish divergence pattern. Therefore, while the overall outlook for the pair is bearish, we can’t rule out a situation where the pair bounces back as traders fade the dollar rally.