The GBP/USD experienced a slight pullback against the United States dollar on Tuesday, as traders' attention shifted toward the upcoming Federal Reserve meeting on Wednesday. Market participants are contemplating whether the Federal Reserve will slow down or continue to defy market expectations by adopting a hawkish stance in combating inflation.
The 1.23 level just above poses resistance, which may explain the recent pullback. Beyond that, the 1.25 level represents a formidable barrier, with a double-top formation previously observed at this level. This formation highlights the market's hesitation to break above the 1.25 level, a significant psychological barrier with historical importance in trading.
The 200-day exponential moving average (EMA) is currently flat near the 1.21 level, while the 50-day EMA sits just below, providing support. If the market can break through these levels, it may attempt to breach the 1.20 level. However, such a move is unlikely to occur before the Federal Reserve announcement. If the Federal Reserve adopts a more hawkish stance than anticipated, with the market currently pricing in a 70% chance of a 25-basis point rate hike, the US dollar could surge, causing the GBP/USD pair to plummet. Conversely, if the Federal Reserve refrains from hiking rates, the pair may experience a short-term move higher, potentially piercing the critical 1.25 level.
Be Cautious With Your Position Size
- The primary challenge with the upcoming announcement is that Federal Reserve Chairman Jerome Powell's statement will likely contain elements that appeal to various market participants.
- If the Federal Reserve opts not to raise interest rates, this could be interpreted as supporting the markets, but it may also lead to questions about whether the economic situation is worse than initially thought.
- In other words, the announcement is unlikely to alleviate market concerns, and volatility is expected to persist.
At the end of the day, the British pound has pulled back slightly against the US dollar as traders focus on the forthcoming Federal Reserve meeting. The market's future direction will be heavily influenced by the Fed's decision on interest rates and the overall tone of the announcement. You should probably be cautious with your position size as Jerome Powell almost certainly says something for everyone, thereby causing even more confusion as his announcements typically do. Expect a lot of back-and-forths, but I do think that the US dollar is being oversold unless, of course, the Federal Reserve changes its overall attitude.
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