GBP/USD Forecast: Bailey bails sterling out, Nonfarm Payrolls may test critical support

Tip-toeing toward tightening – the Bank of England has indicated it is ready to "modestly" change its monetary policy, and that has eventually proved to be positive for the pound. A bigger test is due now.

The BOE left its policy unchanged and only one member – Michael Saunders – voted for an imminent tapering of its bond-buying scheme. That initially sent sterling lower as some had expected the bank's Dave Ramsden to join him.

However, BOE Governor Andrew Bailey later boosted the pound by saying that he is ready to act if the current rise in inflation – described as transitory – has secondary effects such as pushing prices higher. His more determined remarks resulted in sterling outperforming some of its peers against the dollar. 

Nevertheless, the greenback remains strong, benefiting from the Federal Reserve's move toward tapering its own bond-buying scheme. Fed Vice-Chair Richard Clarida's comments on announcing a reduction in purchases this year continue reverberating through markets. Most other members echoed his words.

The Federal Reserve Sets the Pace: The world's central bank prepares to taper

In recent days, only the Fed's Neel Kashkari voiced opposition to withdrawing support, saying that some nine million people are unemployed. The labor market is now in focus as the US releases its Nonfarm Payrolls report for July. Economists expect an increase of 870,000 positions, but estimates vary widely, partly a result of mixed leading indicators. 

Nonfarm Payrolls Preview: Why the dollar could surge in (almost) any scenario

US July Nonfarm Payrolls Preview: Analyzing major pairs' reaction to NFP surprises

Apart from the headline number, investors will also be watching Average Earnings. Any increase in wages implies higher inflation down the road and a growing chance of tapering. 

The question for GBP/USD traders is – will Nonfarm Payrolls outweigh the pound's resilience or not? The answer will be known soon enough.

GBP/USD Technical Analysis

Pound/dollar is benefiting from upside momentum on the four-hour chart and the currency pair escaped dropping below the 50 Simple Moving Average. Moreover, it bounced off 1.3875, which is now a critical support line.

If the NFP sends cable lower, the next cushion awaits at 1.3850, and then only at 1.3760. 

Resistance is at 1.3950, the high point on Thursday, and then at 1.3980, July's high. Above 1.40, the first significant cap is 1.4030.