The GBP/USD Rate Pulls-Back After Fed Hikes Rates
The Pound gave up early gains against the Dollar on Tuesday after the Federal Reserve increased interest rates by 0.25% to 1.25% and reiterated their commitment to raising them again before the end of the year.
The pair rose before the meeting on unexpectedly poor inflation and retail sales data, reaching a peak of 1.2806, however this was later offset of the Fed's continued optimism despite the data.
Fed Chair Janet Yellen underlined the strong labour market in her press conference and said this would inevitably lead to higher inflation eventually.
The pair then fell from 1.28 to the 1.27's, back, more or less to the level it was at before the meeting, as illustrated by the chart below, which still remains relevant:
The chart shows how GBP/USD formed a three-wave a-b-c correction down from the 1.30 May highs.
The c-wave lows have coincided with a trendline drawn from the October lows, which is providing support for the exchange rate.
The fact that the trendline is situated just below the c-wave lows makes further losses unlikely unless there is a decisive break below.
Even then, the 200-day MA, situated not far below at 1.2569 is a further obstacle to more downside.
Only a break below the 1.2500 level would confirm both trendline and the 200-day had been broken.
Such a move would probably reach a target at 1.2400.
The move, though steep, down from the May highs is still only, technically, a correction, which means it could easily resume its ascent and return to the 1.30 summits.
The pair has already bounced, but not sufficiently to suggest a resumption of the previous uptrend is afoot.
Here too a moving average stands in the way of further gains, except in this case the 50-day MA.
Ideally, we would want to see a clear break above the 50-day for confirmation of more upside.
Such a move would have to move above the 1.2875 level to gain confirmation, with a target at 1.3000.
Data for the Pound
The most significant release will be the minutes of the Bank of England (BOE) Rate meeting published just after the announcement has been made on Thursday at 12.00 BST.
These are likely to show a 7-1 voting split with Kirsten being the only dissenter again (it will be her last meeting).
Inflation rose more steeply than forecast in May, but this is unlikely to feed through into more hawkish rhetoric as, ““entirely” driven by the weaker currency. Demand indicators remain mixed, so there’s little evidence that this assessment will change,” according to analysts at TD Securities.
A more hawkish stance would propel the Pound higher, of course, but this unlikely to happen, especially given the lacklustre earnings data out this morning.
This showed that despite the unemployment sticking at a relatively low 4.6% UK average wages had slowed down more than expected in April to 1.7%, from 1.8% in the previous month. This was well below the 2.0% expected.
