GBP/USD Forecast: Keep calm, ignore risks, carry on in the uptrend channel (at least until the Fed)

Zoos will be the next to reopen may open but pubs may have to wait longer – that is the likely message from Prime Minister Boris Johnson, who will layout the next baby steps in the UK's reopening. Press reports about the slow return to normal should have weighed on the pound, but markets ignore it, like several other sterling downers.

GBP/USD has been extending its gains, hitting the highest since March and nearing 1.28. The main drive is dollar weakness, as investors get rid of the greenback ahead of the Federal Reserve's decision.

Fed focus

The world's most powerful central bank is set to leave interest rates unchanged but reiterate its pledge to support the economy. The Fed publishes new growth, employment, inflation, and interest rate forecasts. Markets will want to see when the bank expects to see single-digit employment and a return to pre-pandemic output.

Jerome Powell, Chairman of the Federal Reserve, will meet the press and will likely respond to the recent upbeat Non-Farm Payrolls figure, as well as rising returns on US debt, which weigh on households and on government borrowing.

Some speculate that the Washington-based institution may launch Yield Curve Control (YCC) – to keep long-term rates lower, thus pushing the dollar down. Negative rates seem off the agenda, but further expanding the balance sheet – which ballooned to over $7 trillion – is on the cards. The Fed has fueled the rally in stocks and may also take note of elevated valuations.

Tension toward the Fed decision usually keeps ranges limited, but this time may be different. See: 

• Fed Preview: Propelling stocks with more surprises or compressing the froth? Five things to watch
• Fed Preivew: We know where we are and how we got here but where are we going?
• FOMC Preview: What else can the Fed do?

Sterling suffering? 

There are several reasons to sell sterling, which are ignored for now. The gradual approach comes as daily new cases have decelerated the downfall and the road to eradicating the disease seems long.

Source: WorldInfoMeter

The Organization for Development and Cooperation (OECD) published new growth forecasts which project a plunge of 11.5% in Britain's Gross Domestic Product this year – worse than the eurozone.

Brexit talks remain deadlocked and with every day that passes, the chances that the UK falls back to World Trade Organization terms are growing. Hopes for intervention by leaders is probably helping the pound. 

Protests against racial discrimination and supporting the removal of statues of slave traders continue in the UK, yet tensions are minuscule in comparison to those in the US. President Donald Trump's handling of the crisis has cost him support according to several opinion polls. Markets are watching from afar, but if Democrats have a growing chance of a clean sweep in November, investors will pay attention.

Overall, the focus is mostly on the Fed and hopes for more monetary stimulus. However, things may change afterward.

GBP/USD Technical Analysis

Pound/dollar is trading in the uptrend channel after a brief dip below it on Tuesday. The Relative Strength Index on the four-hour chart is below 70, thus outside overbought conditions. Upside momentum has only somewhat waned and remains supportive of further gains.

The fresh high of 1.2785 is the first resistance level to watch. Breaking it opens the door to prices last seen before the pandemic, such as 1.2850 and 1.2990. 

Some support is at the previous peak of 1.2750, followed by 1.2625, which was Tuesday's low. Further support is at 1.2575 and 1.25.