GBP/USD bulls break key structure on dovish Fed chair Jerome Powell speech

GBP/USD staged a significant recovery on Wednesday after an earlier drop on fear of a hawkish speech from Federal Reserve (Fed) chairman Jerome Powell. The British Pound broke 1.2080 into the rollover on Thursday following a rally from the depths of the day's business at 1.1900. A number of factors are impacting GBP/USD from all sides of the world, including China coronavirus, Bank of England (BoE) and Fed sentiment.

US Dollar sinks on Fed dovish rhetoric

Fed's Jerome Powell signalled that the central bank will be raising rates by just 50bps in December which weighed on the US Dollar. Fed's Jerome Powell said the policy will most likely need to remain restrictive for some time and that it makes sense to moderate the pace of interest rate increases. He said that the time to slow the pace of rate hikes could come as soon as the December meeting.  

Consequently, a weaker US Dollar index, DXY, fell out of the sky to a low of 105.77. The yield on the US 10-year note was down to 3.604%, dropping below the last low that was made on November 28th. The US Dollar is on track for its biggest monthly loss since September 2010 as investors look toward the Fed reaching a peak rate early next year. Markets now see a 75% chance for a smaller 50 bps interest rate hike in December, after four consecutive 75 bps increases.

China coronavirus risk

China coronavirus risks continue to drive markets and signs that the nation would soon reopen its economy have lifted the commodity complex mid-week. There was some favourable news for risk currencies such as the British Pound of China starting to immunize senior citizens against COVID-19. Authorities also announced the lifting of lockdowns in around half of the districts throughout the southern metropolis of Guangzhou on Wednesday afternoon.

GBP positioning 

Analysts at Rabobank explained earlier in the week that net short GBP speculators’ positions fell back for a fourth consecutive week as gilts yields stayed at pre-mini budget levels:

''While a new Prime Minister has followed a new Chancellor and emergency measures from the BoE, all of which have supported UK assets, the country’s fundamentals remain sour. A hefty 75 bps rate hike from the BoE this month failed to support the pound in the spot market, given the Bank’s gloomy UK economic forecasts,'' the analysts said. ''The sour tone of OBR forecasts has weighed on GBP in the spot market since the Autumn Statement.''

In the spot market, the British Pound has made its biggest one-month gain against the dollar since July 2020. However, fears of a lengthy UK recession are still weighing on sentiment, with the pound down 10% this year. Market players are pondering the BoE's next move, with the Monetary Policy Committee, the BoE's rate-setting body, expected to increase rates by 50 basis points with a lesser 25% chance of a 75 basis point hike.

GBP/USD technical analysis

GBP/USD is running into an area of prior resistance where liquidity is eyed between 1.2270/90/20. In the meantime, 1.1900 is key to the downside. As seen on the 1-hour chart, 1.1900 liquidity was swept: 

GBP/USD H1 chart

The 1-hour GBP/USD chart shows a break of the structure (BoS) but the price imbalances left behind could offer the bulls targeting liquidity at 1.2150 a discount. Below a 50% mean reversion offers a price in GBP/USD at  1.1990 while 1.1970 comes near a 61.8% ratio.