US Dollar Analysis: GBP/USD Has a Look Below 1.2850 Support Ahead of the Fed

US Dollar Takeaways

The market has priced in 99% odds of a 25bps interest rate hike from the Fed this week…but only about a 33% chance of another rate increase this year.
Traders will key into the FOMC’s monetary policy statement and Chairman Powell’s presser for market-moving tidbits about future policy.
GBP/USD is having a look below 1.2850 support – the rising trendline and 50-day EMA near 1.2725 could come into play next.

US Dollar Fundamental Analysis

It’s the season of paradoxes:

It’s the middle of summer, but parents are already planning for “back to school.”
The only movies that succeed in theatres nowadays are sequels, but “Barbenheimer” is dominating the weekend box office.
And there are three normally “high impact” central bank meetings, but every trader already “knows” what the Fed, ECB, and BOJ will do this week.

Keying in on the US central bank today, the CME’s FedWatch tool shows traders are pricing in a 99% chance that Jerome Powell and Company will raise interest rates by 25bps on Wednesday, as hinted around the June FOMC meeting and reiterated since:

Source: CME FedWatch

Assuming the Fed doesn’t want to upset the apple cart (and there’s no suggestion that central bankers do), the interest rate decision is unlikely to lead to much volatility in the market. That said, the communication around the decision will be closely scrutinized. At their June meeting, Fed policymakers implied that two more 25bps interest rate hikes were likely this year, but the market is skeptical; traders are pricing in only a 1-in-3 chance of another rate hike after this week’s (presumed) move:

Source: CME FedWatch

With no updates to the Fed’s economic forecasts scheduled, all eyes will be on any changes to the central bank’s monetary policy statement and crucially, Fed Chairman Jerome Powell’s press conference. If Powell hints at additional tightening in September or November, traders may adjust their priors, leading to strength in the greenback and weakness in equity indices. Meanwhile, a more balanced or outright dovish press conference could convince dollar bears and index bulls to press the markets further as the end of the most aggressive rate hike cycle in recent history may finally be at hand.

US Dollar Technical Analysis – GBP/USD Daily Chart

Source: TradingView, StoneX

As the chart above shows, US dollar traders aren’t particularly concerned about the Fed meeting. GBP/USD is trading at a two-week low under previous-resistance-turned-support at 1.2850, potentially opening the door for a deeper retracement toward rising trend line support and the 50-day EMA near 1.2725 if the Fed comes off as relatively hawkish. Meanwhile, a more dovish Fed statement and press conference could reinvigorate the GBP/USD uptrend; in that scenario, a move back above 1.2850 could open the door for a recovery rally toward 1.30 as the market-expected interest rate divergence between the two countries narrows.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.