GBP/USD: Expecting a re-test of 1.51 by the weekend

A 700-pip rally caught many by surprise

The cable is up more than 700-pips from the low of 1.4564 seen in mid-April, which caught many banks and traders by surprise. Most of the market participants were expecting the pair to be offered heavily ahead of the general elections in the UK. However, the markets seem to have ignored the possibility of a hung parliament, thereby sending the pair to a high of 1.5303.

USD sellers dominate ahead of the FOMC statement

The American dollar has been sold from the last week as each set of disappointing US economic data convinced markets that the Federal Reserve would not raise rates before the end of the current year or early part of the next year. Earlier, the markets were expecting the Fed would raise rates in June.

The cable turned out to be one of the biggest beneficiaries of the markets’ view regarding the delay in the interest rate hike in the US. Moreover, the slightly less dovish Bank of England minutes released last week titled the sentiment in favor of Pound.

So, till now, the UK election uncertainty has been overshadowed by the shift in the US rate hike expectations and broad based USD index.

GBP/USD could be offered around 1.53-1.5344, Eyes 1.51

Ahead of the Wednesday’s FOMC statement, the pair could run into fresh offers around 1.53-1.5344. The weakness in the USD since the last week indicates the markets could have priced-in a slightly dovish Fed statement. Hence, the markets are likely to shift focus to the UK election uncertainty going into the weekend.

The possibility of a hung parliament is for real as indicated by the election polls. Four polls published on Monday showed just how close and unpredictable the election outcome is. Moreover, the polls showed neither the Tories nor Labour can sustain a consistent lead in the polls.

Given the markets have priced-in the possible dovish FOMC statement, the focus is likely to shift back on the election uncertainty and a weaker-than-expected UK first quarter GDP data released today. A weak GDP print is likely to delay the rate hike expectations in the UK as well.

Meanwhile, election uncertainty could see the pair mimic the moves seen back in 2010 in run up to elections, when it had dropped 300 pips. A similar move could see the pair drop to 1.50 levels ahead of the weekend.

However, the losses are likely to be capped around the falling trend line support on the weekly chart located at 1.51. On the hourly charts, the RSI has clearly formed lower highs despite the pair posting higher highs since Apr. 22. Meanwhile, the RSI also hit overbought zone on the 4-hour time frame. Consequently, there is a high possibility of a technical correction too. A drop below 1.5228 (76.4% Fib expansion of 1.4564-1.5051-1.4854) could see a sharp sell-off towards 1.51 levels. On the other hand, immediate gains appear capped 1.53and 1.5344 (100% Fib expansion).