GBP/USD Forecast: Boris Johnson may unleash the bears after the Fed fed the bulls

What just happened: Dovish Fed and BOE

GBP/USD has been on the rise as central banks dominated by taking dovish stances – the Federal Reserve more than the Bank of England.

The Fed has left its interest rates unchanged but hinted of potential cuts. The world's most powerful central bank has scrapped its "patient" stance amid increasing uncertainties – trade tensions – and also due to low inflation. While the Fed's official projections still point to holding rates at current levels and an upbeat view on jobs and growth, are awaiting upcoming data "closely" and may cut interest rates. Some analysts now foresee a reduction of no less than 50 basis point coming in the upcoming July meeting. Jerome Powell, Chair of the Federal Reserve Board of Governors, has reiterated that crosscurrents are clouding the outlook.

On the other side of the pond, the BOE has said it still intends to raise interest rates – yet in a gradual and limited manner. However, Governor Mark Carney and his colleagues have acknowledged a weaker economic outlook, wage growth leveling off, and market fears of a hard Brexit. All in all, the BOE has taken steps towards removing its hawkish bias.

Ahead of the BOE decision, UK data mostly met expectations. UK consumer price index slowed down to 2.0% year on year as expected in May. Retail sales dropped by 0.5% last month – also within estimates. Second-quarter growth is likely weak.

Boris Johnson remains the favorite to lead the Conservative Party and the UK after coming out on top in the first stage of the leadership contest. Hardliner Dominic Raab moderate Rory Stewart and three other candidates were eliminated in a series of votes. The former foreign secretary and his successor Jeremy Hunt have been selected by Tory MPs to face 160,000 members of the party in a postal ballot.

Johnson has said that the UK must leave the EU by October 31st – with or without a deal – in line with the party's membership. Hunt holds more moderate views on the hot topic. 

UK events: GDP and statements from Johnson

Critics have accused Johnson of being inconsistent with his comments – telling each MP what she or he wanted to hear. After winning the support of MPs and facing off Hunt, the leading candidate may sharpen his pro-Brexit statements – winning over members' support. A clear commitment to leave the EU without a deal may weigh on the pound.

The economic calendar features a testimony by the BOE's Carney early in the week – where he is likely to repeat the messages he conveyed in the rate statement. Carney may dive into the Brexit debate by increasing his warnings about the consequences of a hard Brexit. 

The leading economic indicator is due on Friday – final Gross Domestic Product for the first quarter. According to the first release, the economy grew by 0.5% on a quarterly basis and 1.8% year on year – partly due to stockpiling ahead of the planned Brexit date of March 29th. The final release may show a downgrade to slower growth. 

Overall, politics will likely have more impact on the pound than economic indicators.

Here are the events lined up in the UK on the forex calendar:

 

US events: Durable goods orders, GDP in focus

Preparations towards the all-important summit between US President Donald Trump and his Chinese counterpart Xi Jinping next weekend are underway. Any headlines leading to the critical encounter may move markets. The world's largest economies are set to announce the resumption of talks, but it is unclear if they will achieve any breakthrough amid differences on technology, intellectual property, and more. 

Fed Chair Powell will have another chance to influence markets in a speech on Tuesday, which also features housing figures, and the Conference Board's consumer confidence for June – a slide in sentiment is on the cards.

Durable goods orders for May will likely move markets on Wednesday. An improvement is projected in this data point that reflects investments, is eyed by the Fed, and feeds into Gross Domestic Product figures for the second quarter.

The final GDP number for the first quarter is due on Thursday. Apart from the headline, traders will watch the underlying inflation component, which was weak in the previous releases – causing worry. 

Last but not least, the Fed's preferred inflation gauge is due on Friday. Core Personal Consumption Expenditure (Core PCE) is expected to remain unchanged at 1.6% – below the bank's 2% objective. 

Here are the scheduled events in the US:

GBP/USD Technical Analysis 

The daily chart shows that GBP/USD is trading in a downtrend channel (thick black lines on the chart). Also, the pair is trading below the 50, 100, and 200-day Simple Moving Averages – adding to the bearish bias.

On the other hand, the Relative Strength Index is stable around 50, and momentum is neutral.

Initial support awaits at 1.2650, which was a swing low in early June before GBP/USD fell to lower levels. The next support line is 1.2605 which stopped halted cable's falls in late May. 1.2560 was the low point in May, and it is followed by 1.2505 which was June's trough. 1.2475 and 1.2445 are next.

Resistance above the downtrend resistance line awaits at 1.2765 which was a double top earlier this month. It is followed by 1.2815 which capped a recovery attempt in late May and also coincides with the 50-day SMA. Further above, 1.2870 was April's low and turns to resistance. 1.2960 and 1.3050 are next.

GBP/USD Sentiment

GBP/USD's recovery may have reached its limits. Johnson will now try to woo the Brexit-supporting members of his party and may weigh on the pound. Hopes for a successful Trump-Xi summit may not be enough to push it higher. All in all, there is more room to the downside than to the upside.

The FXStreet Poll shows that the experts are mixed. They are neutral in the short term, marginally bearish afterward, and bullish in the long-term. The targets are close to each other. Only the medium-term target has suffered a downgrade.

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