GBP/USD Analysis: Post-FOMC rally fizzles out rather quickly, focus shifts to BoE

• GBP/USD witnessed some short-covering move on Wednesday amid broad-based USD weakness.
• Fed Chair Powell downplayed the possibility of super-size hikes and weighed heavily on the buck.
• Expectations for a further tightening by the Fed revived the USD demand and capped the major.
• Market participants now look forward to the BoE monetary policy decision for a fresh impetus.

The GBP/USD pair rallied nearly 200 pips intraday and shot to over a one-week high on Wednesday amid the post-FOMC US dollar downfall. As was widely expected, the US central bank announced the largest interest rate hike since 2000 and the start of quantitative tightening (QT). The Fed raised its benchmark interest rate by 50 bps and said that its near $9 trillion balance sheet would be allowed to decline by $47.5 billion per month in June, July and August. The reduction would increase to as much as $95 billion per month in September. The USD, however, witnessed a typical ‘buy the rumour, sell the news’ kind of trade after Fed Chair Jerome Powell downplayed expectations for an aggressive tightening path.

In the post-meeting press conference, Powell said that the Fed was not actively considering a 75 bps rate hike and that policymakers were ready to approve similar-sized rate hikes at upcoming meetings. The comments sent the US Treasury bond yields lower, which, along with the risk-on impulse, weighed on the safe-haven greenback and prompted some short-covering around the GBP/USD pair. That said, the markets are still pricing in further 200 bps rate hikes for the rest of 2022. This, in turn, helped limit deeper losses for the buck and capped the major, rather attracted fresh selling during the Asian session on Thursday. Spot prices slipped back below mid-1.2500s as the focus now shifts to the Bank of England (BoE) meeting.

The UK central bank looks poised to raise interest rates for the fourth time since December to the highest level in 13-years to contain inflation, which has leapt to a 30-year high. Meanwhile, the overnight index swaps markets predict that the BoE will hike six more times in 2022, raising prospects for disappointment. It is worth recalling that the MPC voted 8-1 to hike rates by 25 bps in March. Any sign of widening dissents in favour of keeping the interest rate unchanged would be seen as a dovish tilt and suggest that the rate hike cycle could be nearing a pause. This would be enough to prompt aggressive selling around the British pound and set the stage for the resumption of the GBP/USD pair's recent bearish trend.

Heading into the key event risk, traders might take cues from the release of the final UK Services PMI. Meanwhile, the US economic docket features the usual Weekly Initial Jobless Claims, though is likely to be overshadowed by the post-BoE volatility. Apart from this, some repositioning trade ahead of the closely-watched US monthly jobs report - NFP on Friday - should allow traders to grab some meaningful opportunities around the GBP/USD pair.

Technical outlook

From a technical perspective, the pair's inability to capitalize on the overnight strong move up and the emergence of fresh selling suggests that the recent downtrend might still be far from over. That said, any subsequent decline is more likely to find decent support near the 1.2500 psychological mark, below which spot prices could slide back to the overnight swing low, around the 1.2470-1.2465 region. Bearish traders could eventually aim to challenge the YTD low, around the 1.2410 area.

The latter should act as a pivotal point, which if broken decisively will be seen as a fresh trigger for bearish traders. The pair would then accelerate the fall towards intermediate support near the 1.2345 region en-route the 1.2300 mark before eventually dropping to June 2020 low, around mid-1.2200s.

On the flip side, the 1.2600 round-figure mark might now cap the immediate upside ahead of the post-FOMC swing high, around the 1.2635-1.2640 region. The next relevant hurdle is pegged near the 1.2670 area, or the 38.2% Fibonacci retracement level of the recent slump witnessed over the past two weeks or so. A convincing breakthrough the latter would suggest that the pair has formed a near-term bottom and set the stage for additional gains.