GBP/USD: Renewed downside pressure ahead of Fed Wednesday

<p>Last week’s GBP/USD rise was largely the result of a broad pullback for the US dollar, which saw substantial profit-taking after having shown persistent strength […]</p>

Last week’s GBP/USD rise was largely the result of a broad pullback for the US dollar, which saw substantial profit-taking after having shown persistent strength recently ahead of an expected rate hike by the US Federal Reserve this week.

This rise for GBP/USD last week occurred in spite of several news and data economic events that should normally have weighed rather heavily on the British pound. Soft manufacturing production and trade balance readings out of the UK were both significantly worse than expected.

In addition, the Bank of England’s (BoE) Monetary Policy Committee, which voted 8-1 in favor of keeping interest rates on hold as opposed to hiking rates, issued a policy summary that was generally viewed as dovish. BoE policymakers made it clear that there would be no urgency to raise rates, even as the US is potentially on track to hike this week.

The beginning of this week has seen a retreat for GBP/USD to follow-up on last week’s climb. This retreat comes ahead of not only the pivotal Fed rate announcement on Wednesday, but also key inflation readings from both the UK and US. Tuesday brings Consumer Price Index (CPI) data from the UK as well as the US.

While the US data is unlikely at this late stage to make a substantive impact on the rate decision from the Fed, which is slated to begin meeting that day, the UK CPI could help either widen or narrow the discrepancy between the potential monetary tightening cycles of the BoE and Fed. Persistently weak UK inflation figures have been an important contributor to the reluctance of the BoE to raise interest rates.

GBP/USD Daily Chart

 

From a technical perspective, last week’s rise pushed GBP/USD above the key 1.5200 level to touch its 50-day moving average before retreating in the beginning of this trading week. Monday saw the currency pair come close to touching the 1.5100 support level to the downside. Since the 1.5900-area high back in mid-June, GBP/USD has formed a series of progressively lower lows and lower highs for the entire latter half of this year, declining within a well-defined bearish trend.

On any sustained breakdown below the noted 1.5100 level, this bearish trend is poised to continue its decline towards the 1.5000 psychological level. Any continued GBP/USD drop in the event of a Fed rate hike and continued deferment of BoE monetary tightening could lead to further downside objectives at the 1.4800 and 1.4600 support levels.

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