Last week, the British pound strengthened as traders anticipated a rate hike by the Bank of England. So, the GBP/USD pair advanced and was further supported by a weaker US dollar.
Just as expected, the UK regulator raised the key rate to 0.75% from 0.50%, noting that a further tightening may be appropriate in the coming months.
However, the pound sterling depreciated shortly after the Bank of England raised the rate as the regulator warned of the risks regarding further monetary tightening. In particular, this will depend on how inflation evolves in the medium term. Besides, one out of nine MPC members voted for keeping the rate unchanged.
In addition, trade negotiations between the EU and the UK have come to a standstill. Since there is no progress, the UK officials may apply Article 16 which allows them to unilaterally withdraw from obligations agreed on during Brexit. At the moment, Northern Ireland actually remains part of the EU's customs union. So, the disagreement regarding the new customs checks may further aggravate the conflict.
Therefore, the prospects of a further monetary tightening by the BoE are vague now.
What is more, the ongoing military operation in Ukraine puts additional pressure on the pound. The data showed that UK GDP rose by 0.8% from -0.2% in January (by 10% on an annual basis from 6% in December) thus beating the forecast. However, analysts warn that the pace of growth may considerably decline in the near future due to the situation in Ukraine.
In addition to this, the US dollar remains in high demand among traders, being a popular safe haven asset, especially when there is no progress in peace talks between Russia and Ukraine. Apparently, investors prefer USD to other safe haven assets such as gold and the yen.
The US Federal Reserve raised the interest rate by 25 basis points to 0.50% at its latest meeting, thus kicking off a campaign aimed at the monetary tightening. This makes the US dollar even more attractive to investors, especially in the long term. The Fed officials are planning six more rate hikes this year, which proves that the US regulator has a more hawkish stance compared to other central banks, including the Bank of England.
At the press conference following the meeting, Fed Chair Jerome Powell said that the US economy was very strong even against the backdrop of an over-heated labor market and high inflation. The Fed also plans to reduce its $9 trillion balance sheet at its next meeting in May.
This week, the pound traders will anticipate the consumer price index that is due to be out on Wednesday (07:00 GMT). This indicator reflects the dynamics of retail prices for a group of goods and services that make up the consumer basket in the UK and serves as the main gauge of inflation. In January, consumer prices rose by 5.5% year-on-year. The data confirmed growing inflationary pressures which may act as a bullish factor for the pound sterling. The reading below the forecast or the previous data may weaken the pound since a lower inflation rate will allow the Bank of England to ease its monetary policy.
The UK CPI for February is projected to rise by 0.6% (5.9% year-on-year).
As for today, the main event will be the speech by Fed Chair Jerome Powell (16:00 GMT). His comments may affect USD both in the short and long terms. A hawkish stance on the monetary policy will support the greenback, while a less aggressive approach will be a negative factor for the dollar. An unexpected statement may trigger high volatility in the market.
Technical analysis and trading recommendations
At the time of writing, the GBP/USD pair was trading near the level of 1.3040, staying in the bear market below the key resistance of 1.3390 (EMA200 on the weekly chart) and 1.3515 (EMA200 on the daily chart).
The pair continues to trade in negative territory, moving within the descending channels on the daily and weekly charts. The lower boundary of the descending channel on the weekly chart is found at the level of 1.2865.
A breakout of this support level will strengthen the downtrend on the pair, sending it towards the local lows of 1.2685 and 1.2400.
In a different scenario, GBP/USD may resume growth. As you can see on the 1-hour chart, the price has already broken above an important short-term resistance level (200-period moving average). This was the first signal indicating the start of an uptrend.
If the price breaks through the resistance level of 1.3210 (the Fibonacci retracement level of 23.6%, indicating the correction against the fall that took place within the wave formed in July 2014 near the level of 1.7200), the corrective growth may continue towards the resistance at 1.3308 (EMA200 on the 4-hour chart). A breakout of the 1.3365 and 1.3390 resistance levels (EMA200 on the weekly chart) will intensify the upward movement. A breakout of the key resistance level of 1.3515 may take GBP/USD back into the bull market. The bullish trend will be confirmed by a break above the local resistance levels of 1.3500 and 1.3640.
According to the main scenario, it is better to stay short on the pair. A breakout of the support areas at 1.3141 and 1.3110 will indicate the resumption of the bearish trend.
Support levels: 1.3141, 1.3110, 1.3000, 1.2950, 1.2865, 1.2685, 1.2400, 1.2250, 1.2085, 1.2000
Resistance levels: 1.3160 1.3210 1.3275 1.3308 1.3365 1.3390 1.3430 1.3515 1.3580 1.3640 1.3700 1.3745 1.3832 1.3900 1.3970
Trading recommendations
GBP/USD:
Sell Stop 1.3130. Stop Loss 1.3180. Take Profit 1.3110, 1.3000, 1.2950, 1.2865, 1.2685, 1.2400, 1.2250, 1.2085, 1.2000.
Buy Stop 1.3180. Stop Loss 1.3130. Take Profit 1.3210, 1.3275, 1.3308, 1.3365, 1.3390, 1.3430, 1.3515, 1.3580, 1.3640, 1.3700, 1.3745, 1.3832, 1.3900, 1.3970, 1.4000.