Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.3550.
- Add a stop-loss at 1.3835.
- Timeline: 1-2 days.
Bullish view
- Buy the GBP/USD pair and set a take-profit at 1.3835.
- Add a stop-loss at 1.3550.
The GBP/USD exchange rate dropped sharply as the US Dollar Index (DXY) staged a strong comeback after the recent Federal Reserve news. If dropped to a low of 1.3688, down sharply from the year-to-date high of 1.3876.
Bank of England Decision Ahead
The GBP/USD exchange rate retreated sharply after the Federal Reserve delivered its interest rate decision and after Donald Trump announced his nominee for the Federal Reserve Chairman.
The Fed decided to leave interest rates unchanged in the first meeting of the year. In a statement, the bank also upgraded its economic outlook for the year and hinted that its inflation was being contained. All factors constant, the bank is expected to deliver two to three interest rate cuts this year.
The GBP/USD pair also crashed after Trump named Kevin Warsh to be the next Federal Reserve Chair. Unlike Kevin Hassett, analysts believe that Warsh will maintain a relatively hawkish view in the long term. He has historically voiced opposition for quantitative easing policies and criticized the Federal Reserve for delivering several interest rate cuts.
The main catalyst for the GPP/USD pair this week will be the Bank of England (BoE) interest rate decision, which will come out on Thursday.
Economists polled by Reuters expect the bank to leave interest rates unchanged and maintain a more hawkish tone as inflation has remained at an elevated level in the past few months. The most recent data showed that the headline Consumer Price Index rose to 3.4% in December, higher than the bank's target of 2.0%.
The Bureau of Labor Statistics (BLS) will publish the latest non-farm payrolls (NFP) data, which will come out on Friday. Economists expect the data to show that the economy created 70k jobs in January after adding 50k jobs.
GBP/USD Technical Analysis
The GBP/USD exchange rate pulled back from the year-to-date high of 1.3876 to 1.3688, its lowest level on January 27. It moved below the key support level at 1.3727, its highest on September 17 last year.
The Relative Strength Index (RSI) and the Percentage Price Oscillator (PPO) have pulled back in the past few days. It has moved below the Major S&R Pivot point at 1.3670.
Therefore, the pair will likely continue falling, potentially to the bottom of the trading range at 1.3550. A move above the resistance level at 1.3875 will invalidate the bearish outlook.
Ready to trade our free trading signals? We’ve made a list of the best UK forex brokers worth using.