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- GBP/USD jumped back above mid-1.3100s on Wednesday amid a broad-based USD weakness.
- The risk-on mood undermined the safe-haven buck, while the hawkish Fed failed to impress bulls.
- Odds of a 50-bps BoE rate hike benefitted sterling and remained supportive of the movement.
The GBP/USD pair built on the previous day's modest bounce from the 1.3000 psychological mark, or the lowest level since November 2020 and gained strong follow-through traction on Wednesday. The momentum pushed spot prices back above mid-1.3100s and was sponsored by a broad-based US dollar weakness. Signs of progress in the Russia-Ukraine ceasefire talks remained supportive of the optimistic mood in the markets. In fact, Russian Foreign Minister Sergey Lavrov said that there were hopes for compromises and some formulations of agreements with Ukraine are close to being agreed. Apart from this, Chinese officials promised to support economic growth and capital markets, which further boosted investors' confidence and triggered a risk-on rally. This, in turn, drove flows away from traditional safe-haven assets and weighed on the greenback.
On the economic data front, the US Retail Sales showed a plunge in consumer spending and decelerated sharply from the previous month's surge of 4.9% to record a modest 0.3% growth in February. Adding to this, sales excluding autos also came in weaker than anticipated and increased by 0.2% last month, down from the 4.4% jump recorded in January (revised higher from 3.3% reported previously). The data did little to provide any respite to the USD as traders preferred to wait for the outcome of a two-day FOMC meeting. The greenback did get a minor lift after the Fed announced its policy decision and hiked its target fund rate by 25 bps for the first time since 2018. The Fed also hinted at a more aggressive policy response to combat stubbornly high inflation and hinted that it could raise rates at all six remaining meetings in 2022.
In the post-meeting press conference, Fed Chair Jerome Powell emphasised that the economy was strong enough to withstand tighter monetary policy. Powell added that the US central bank could start shrinking its near $9 trillion balance sheet as soon as the next meeting in May. The initial market reaction, however, turned out to be short-lived as the hawkish tilt was more or less in line with market expectations. This was evident from the emergence of fresh selling around the USD. Meanwhile, the pair finally settled near the top end of its daily trading range and was further supported by expectations of a more hawkish Bank of England. In fact, the markets have been pricing in the possibility of a 50 bps rate hike at the BoE meeting on Thursday, which was seen as another factor that acted as a tailwind for the British pound.
Nevertheless, the pair, for now, seems to have entered a consolidation phase as investors seemed reluctant to place aggressive bets heading into the key central bank event risk. Apart from this, trades on Thursday will take cues from the US economic docket, featuring the release of the Philly Fed Manufacturing Index, the usual Weekly Initial Jobless Claims and Industrial Production data. This, along with fresh developments surrounding the Russia-Ukraine saga, will influence the USD price dynamics and infuse some volatility around the pair.
Technical outlook
From a technical perspective, the attempted recovery from the YTD low paused near the 1.3150-1.3160 support breakpoint, turned resistance. The said area coincides with the 23.6% Fibonacci retracement level of the 1.3643-1.3001 downfall, which is followed by the 1.3200 round-figure mark. Some follow-through buying has the potential to lift the pair towards the 38.2% Fibo. level, around the 1.3245 region. The momentum could further get extended towards reclaiming the 1.3300 mark en-route the 50% Fibo. level, around the 1.3320-1.3325 zone (50% Fibo. level).
On the flip side, any meaningful pullback now seems to find decent support near the 1.3100 round figure, which if broken will set the stage for the resumption of the previous bearish trajectory. The pair might then turn vulnerable to slide back to challenge the 1.3000 mark. A convincing break below the latter will be seen as a fresh trigger for bearish traders and accelerate the fall towards the 1.2950 area before the pair eventually drops to the 1.2900 mark. The next relevant support is pegged near 1.2855 ahead of the 1.2820 region.
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