The Pound Sterling (GBP) showed resilience as it rebounded against the US Dollar (USD), testing the crucial 1.3000 level. The GBP/USD pair faced volatility driven by market dynamics and key economic data releases.
Market Recap: A Rollercoaster Week for GBP/USD
GBP/USD experienced a rollercoaster ride, initially dropping to a three-week low of 1.3002 before staging a recovery in the latter part of the week. The US Dollar’s performance was a significant factor influencing the pair, with market sentiment revolving around the upcoming interest rate decision by the US Federal Reserve (Fed).
The release of US labor market data, including Nonfarm Payrolls and Unemployment Rate, led to a late-week rally in the USD, impacting GBP/USD negatively. However, disappointing US economic indicators, such as Producers Price Index and Jobless Claims, reignited hopes of a substantial Fed rate cut, supporting GBP/USD above 1.3100.
What’s Ahead: UK CPI Data, Fed, and BoE Decisions
Investors are now focused on upcoming high-impact events, including the UK CPI inflation report and policy announcements by the Fed and Bank of England (BoE). These events will shape the future direction of GBP/USD.
The week’s schedule includes key data releases like US Retail Sales and UK inflation figures, culminating in the Fed’s decision and Chairman Powell’s press conference. BoE will announce its rate decision without updated projections, while the US will release Jobless Claims, Existing Home Sales, and Philly Fed Manufacturing data.
Friday will see the UK Retail Sales report and a speech by BoE policymaker Cathrine Mann, along with Fed policymakers returning to the spotlight after the ‘blackout period.’
Technical Analysis: GBP/USD Outlook
On the technical front, GBP/USD found support above 1.3045 and reclaimed the 21-day SMA at 1.3119, signaling a bullish momentum. The RSI indicator also crossed 50, hinting at further upside potential.
Key resistance levels to watch are at 1.3218, 1.3266, 1.3300, and 1.3350, while support levels lie at 1.3045, 1.2964, and 1.2894. The pair’s performance will be closely tied to upcoming economic data releases and central bank decisions.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.