Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.2200.
- Add a stop-loss at 1.2425.
- Timeline: 1-2 days.
Bullish view
- Set a buy stop at 1.2360 and a take-profit at 1.2425.
- Add a stop-loss at 1.2250.
The GBP/USD pair slumped to the lowest level since April 2024 after the Fed published highly hawkish minutes of the last meeting. It dropped to a low of 1.2320, continuing a trend that started in September when it peaked at 1.3431.
Potential BoE and Fed divergence
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The GBP/USD pair has been in a strong downward trend in the past few months as investors have embraced the US dollar following Donald Trump’s election. This downtrend is also because of the potential divergence between the Federal Reserve and the Bank of England.
The Fed slashed interest rates by 1% in 2024, while the BoE cut by just 0.50%. Still, there are chances that the situation will change this year as the Fed becomes more hawkish amid inflation fears.
Minutes released on Wednesday showed that Fed officials were more concerned about Donald Trump’s policies and their impact on inflation. They now expect that the headline inflation will take months to move to the target of 2%. As such, they anticipate just two cuts this year, with analysts forecasting the first one in the July meeting.
The BoE, on the other hand, is expected to be more dovish this year. It has been blamed for maintaining higher interest rates for longer than expected, and analysts see the bank cutting rates by at least 1% this year.
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The next important driver for the GBP/USD pair will be the upcoming US nonfarm payroll data, which will come out on Friday. These numbers will provide more information about the labor market, another important data the Fed watches.
Economists expect the NFP figure will be over 150,000, with the unemployment rate at 4.2%. While these are important numbers, their impact on the Fed will be limited because it now focuses on inflation.
GBP/USD Technical Analysis
After the hawkish Fed minutes, the GBP/USD pair continued its strong downtrend this week. The pair has dropped to the 78.6% Fibonacci Retracement level. It has also formed a death cross pattern as the 50 and 200-day weighted moving averages (WMA) crossed each other in November.
Also, the Average Directional Index (ADX0 has remained above 32, a sign that the downward momentum is strong. Also, the awesome oscillator and the MACD indicators have all pointed downwards. Therefore, the pair will likely continue falling as sellers aim for the psychological point at 1.2200.
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