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The GBP/USD exchange rate has gone lower as the U.S. Dollar sweeps higher across the board, analyst and technical forecaster Richard Perry of Hantec Markets says the outlook is now fairly uncertain owing to a messy technical setup.
The GBP/USD rally has just begun to stall in the wake of the FOMC decision.
Technically, we have been talking about the importance of the resistance band 1.2980/1.3050 and with the market turning back from yesterday’s high of 1.3005, this just adds further weight to its importance.
Falling over this morning leaves the market stuck under this resistance band.
However, it has also been a good response in recent sessions and yesterday’s rebound has broken a two week downtrend.
It means that trend lines (both positive and negative) are being broken all over the place. The outlook for GBP/USD is subsequently fairly uncertain.
The bulls need a closing breakout above 1.3050 to regain control, whilst selling pressure needs to break back below 1.2760 to really suggest a continued correction.
The hourly chart shows initial support at 1.2875 needs to hold for the near term improvement to sustain for pressure on the 1.2980/1.3050 resistance area.
In the wake of Fed chair Powell’s speech at Jackson Hole, markets have had a few weeks to position for a new dovish paradigm of FOMC monetary policy.
As part of its new average inflation targeting policy, yesterday the Fed statement says that it will “aim to achieve inflation moderately above 2% for some time”.
It was a high bar that the Fed needed to overcome for renewed dollar weakening. It appears that they have missed it.
In not defining the “time” (either with a level or length of time) this led to a couple of dovish FOMC members dissenting the move (Kashkari and Kaplan).
Although the FOMC dot plots suggest rates are on hold at least until 2023, the market took this as not hitting dovish expectations.
The dollar has notably strengthened across the forex major pairs as a result, whilst Wall Street has slipped back.
This Fed meeting certainly does not change the narrative of looser for longer, but for now, there is a kick back and potential near term short covering dollar rally.
It will be interesting to see how long this lasts before the medium term dollar correction resumes. Resistance at 93.50/94.00 on Dollar Index is key.
The Bank of Japan as expected has left rates unchanged at -0.1% and the 10 year JGB target yield of 0%. The yen has held up well on the back of this amidst a strengthening dollar. Traders will also be looking out for how dovish the Bank of England leans today.
After the BoJ overnight, there is one more major central bank on the economic calendar, with the Bank of England announcing monetary policy, along with a smattering of US data too. First up though is the final reading of Eurozone inflation for August.
After the surprise move to headline deflation, Eurozone headline HICP is expected to remain at -0.2% (-0.2% flash, +0.4% final July), whilst Eurozone core HICP is expected to remain at +0.4% (+0.4% flash, +1.2% final July).
The Bank of England is announcing monetary policy at 1200BST which is expected to once more be kept steady, with the interest rate of +0.1% and asset purchase stock at £745bn.
The vote on rates is expected to be unanimous. The US data is all released at 1330BST with the Weekly Jobless Claims expected to once more reduce, to 850,000 last week (from 884,000 previously).
The Philly Fed Business Index for September is expected to drop slightly to +15.0 (from +17.2 in August). US Building Permits for August are expected to improve by +2.5% to 1.52m (from 1.48m in July), whilst US Housing Starts are expected to decline by -1.2% to 1.48m (from 1.50m in July).