GBP/USD Rebound Looks Tepid Ahead of Fed and BoE Decisions

GBP/USD – Prices, Charts, and Analysis

• GBP/USD volatility will ramp up later this week.
• Central bank decisions dominate the skyline.

The British Pound is trying to move higher against the US dollar but is finding life difficult despite the greenback showing signs of short-term weakness. With the Federal Reserve and the Bank of England set to announce their latest monetary policy decisions over the next two days, GBP/USD is likely to get increasingly volatile. The consensus for the Fed is another 75 basis point hike, with an outside chance of one full point, while the market is leaning towards a 50 basis point hike from the UK central bank but with the option of a 75bp hike very much in play. Any deviation from expectations will move cable sharply.

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British Pound Forecast: GBP/USD Slumps to a 37-Year Low Ahead of BoE

While central bank decisions dominate the market this week, in the UK the new Prime Minister Liz Truss and her Chancellor of the Exchequer Kwasi Kwarteng will announce their ‘plans for growth’ to try and help the UK economy. Plans include cutting National Insurance and canceling a hike in corporation tax. The PM is also expected to finalise plans and announce payments to help individuals and businesses cope with soaring energy prices. The PM is expected to announce energy payments on Wednesday while the Chancellor will deliver his mini budget on Friday.

A look at UK borrowing costs shows the market taking a dim view of the upcoming fiscal announcements. UK gilt yields continue to push to multi-year highs with the interest-rate sensitive 2-year now offered with a yield of 3.25%, up 13 basis points today and back at levels last seen at the end of 2008. Higher short-term yields normally support a currency, however, this is not the case for the British Pound. Sterling continues to fall against a range of other currency pairs, and not just against a strong US dollar, as traders continue to test levels of support.

After hitting a 37-year low at the end of last week, cable has pushed slightly higher, primarily due to a touch of US dollar profit-taking. While the greenback may consolidate further, it is still expected to push higher and this will continue to weigh on cable. Unless the BoE surprises on Thursday with a hawkish rate hike, GBP/USD looks set to move lower in the weeks ahead.

GBP/USD Daily Price Chart – September 20, 2022

Retail trader data show 80.01% of traders are net-long with the ratio of traders long to short at 4.00 to 1. The number of traders net-long is 1.93% higher than yesterday and 10.90% higher from last week, while the number of traders net-short is 16.32% higher than yesterday and 19.49% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed GBP/USD trading bias.

What is your view on the British Pound – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.