- GBP/USD battered to 21-month lows just above 1.2400.
- The US dollar index surged to its highest level in 20 years.
- Cable could see a technical rebound ahead of the Fed and BOE decisions.
There was no reprieve for GBP bulls, as the previous week’s selling spiral gathered steam and smashed GBP/USD to its lowest level since July 2020 at 1.2410. King dollar reigned supreme amid heightening volatility within the G10 fx space throughout the week. The monetary policy divergence between the Fed and BOE will remain the main underlying theme ahead of policy announcements and US Nonfarm Payrolls.
GBP/USD: A brutal week
GBP/USD set off the week on the wrong footing, extending Friday’s 200 pip meltdown below the 1.3000 level. Over the week, the currency pair lost roughly 2.5% and hit 21-month lows, as the US dollar was on a rampage amid varied factors and a relatively better market mood. The US dollar index reached its highest in 20-years just shy of the 104.00 level.
In the absence of any first-tier economic releases from the UK, the major remained at the mercy of dollar price action. The greenback remained the most sought-after currency, as aggressive Fed rate hike expectations shot through the roof, with the CME’s FedWatch tool showing a 96.5% probability of a 50 bps rate hike in May and a 85% chance of a 50 bps June lift-off.
Further, China’s covid lockdowns extended into Beijing while the Shanghai-reopening hopes faltered on a fresh uptick in infections. Chinese lockdowns-induced supply chain constraints raised concerns over global growth prospects, while Europe battled an energy crisis, in the face of the Russia-Ukraine war. In times of uncertainty and market unrest, investors took refuge in the ultimate safe-haven, the dollar. Additionally, the dovish BOJ policy outcome triggered a massive slump in the yen, which powered the unrelenting dollar upsurge.
Meanwhile, the divergence between the Fed and BOE also remained in play and kept GBP bulls at bay. Although a 1.4% contraction in the US economy in the first quarter of 2021 prompted a profit-taking decline in the buck heading into the weekly close. This helped the pound breathe a sigh of relief but it remains to be seen if the GBP/USD recovery has additional legs.
Week ahead: The Fed, BOE and NFP
The first week of May is likely to be the most eventful and busy week of the month, loaded with the critical Fed and BOE interest rate decisions midweek while the US NFP release will come out on Friday.
On Monday, light trading will likely persist in GBP/USD, as Chinese and the UK markets remain closed in observance of Labor Day. Therefore, thin liquidity could exaggerate moves, aiding the turnaround in cable. The US ISM and S&P Global Manufacturing PMIs, however, could offer some incentives.
Tuesday’s UK S&P Global Final Manufacturing PMI and US JOLTS Job Openings will have little to no impact on the pair, as the Fed meeting commences. The US ADP employment data due on Wednesday will be largely ignored, as the Fed decision and Chair Jerome Powell’s press conference will hog the limelight. Fed and BOE expectations will have a significant influence on the pair ahead of policy announcement.
The US central bank is seen raising interest rates by 50 bps, lifting the target range to 0.75%-1%. In contrast, the BOE will hike the key rate by 25 bps to 1%. The forward guidance on monetary policy, as well as, on the inflation and growth outlook from both the central banks will hold the key for a fresh direction in GBP/USD.
Markets will have little time to settle the dust over the central banks’ events, as US employment data for April will drop in on Friday. The American employment sector remains solid and will continue to justify the hawkish Fed outlook.
GBP/USD: Technical outlook
Despite edging higher on Friday, the Relative Strength Index (RSI) indicator on the daily chart stays below 30, suggesting that GBP/USD has more room on the upside to correct its oversold conditions. 1.2600 (Fibonacci 23.6% retracement of the weekly decline) aligns as initial resistance. If that level turns into support, the next recovery targets could be seen at 1.2700 (Fibonacci 38.2% retracement) and 1.2780 (Fibonacci 50% retracement).
In case the pair comes under bearish pressure and makes a daily close below 1.2410 (21-month low touched on April 28), additional losses toward 1.2300 (static level from June 2020) and 1.2160 (static level) could be witnessed.
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