GBP/USD Forecast: Oversold? Fed-fueled dollar and covid-concerned pound point to further falls


  • GBP/USD has tumbled under 1.40 after the Fed surprised with a hawkish move. 
  • The increase in Britain's covid cases is becoming more worrying.
  • Thursday's four-hour chart is showing cable is entering oversold conditions.

Over 150 pips down – and no end in sight. Pound/dollar has been hit by both dollar-positive and pound-negative news. The new development comes from Washington, where the Federal Reserve shocked markets on Wednesday, with ripple effects carrying into Thursday.

The Fed indicated it is set to raise rates twice in 2023, up from waiting with such a hike until 2024. While Federal Reserve Chair Jerome Powell asked markets to take the bank's projections – aka "dot plot" – with a grain of salt, his comments were upbeat on the economy.

The rapid vaccination campaign and the quick reopening have triggered higher prices that surprised the Fed and that could persist. The conviction that inflation is merely transitory has weakened. Moreover, Powell said he expects significant job gains in the coming months and the quick expansion to continue.

The dollar reacted by surging higher, and after pausing at around 1.40, GBP/USD extended its decline into Thursday. Analysts are changing their forecasts in response to the Fed's hawkishness, triggering a second wave of greenback gains.

Federal Reserve ups the ante on inflation, growth and interest rates

Weekly jobless claims and the Philly Fed Manufacturing Index are of interest later in the day, but Britain's daily update on COVID-19 cases will likely have a stronger effect. The Delta variant continues spreading, pushing the daily infection load toward 10,000.

The government already extended current restrictions through July 19, a four-week delay. This postponement of "Freedom Day" caused some anger among Prime Minister Boris Johnson's backbenchers, but sailed through parliament. The question is: is another delay on the cards? Apart from the political unease, another delay would hurt the economy even more. 

Britain's vaccination campaign has been hailed as one of the best in the world, but those without second doses seem vulnerable. The efforts to accelerate second jabbings and to reach younger people may bear fruits in a week or two, but the current leap in cases is alarming. Sterling could further suffer.

All in all, cable has more room to fall.

GBP/USD Technical Analysis

Pound/dollar has pierced through the 200 Simple Moving Average on the four-hour chart and momentum is to the downside. Is GBP/USD oversold? The Relative Strength Index is "hugging|" the 30 line – on the edge. That means a minor correction could come, but it is far from guaranteed. 

Some support awaits at 1.3930, which capped GBP/USD back in early May. It is followed only by 1.3855, a support line from that time, and then by 1.3825 and 1.38.

Immediate resistance is at 1.3975, which held pound/dollar down in mid-April, and then by 1.4010, a separator of ranges from earlier in the year. Next up, 1.4025 and 1.4070 await the currency pair. 

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