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- GBP/USD dives to a fresh 37-year low on Thursday amid the post-FOMC USD rally.
- Expectations for more aggressive Fed rate hikes, the risk-off mood underpins the buck.
- Oversold conditions on short-term charts offer some support ahead of the BoE meeting.
The GBP/USD pair falls to a fresh 37-year low during the Asian session on Thursday as the post-FOMC US dollar breakout momentum remains uninterrupted. The Federal Reserve raised interest rates by another 75 bps on Wednesday and struck a more hawkish tone, signalling more large rate increases at its upcoming policy meetings. The Fed's so-called dot plot revealed that policymakers expect the benchmark lending rate to top 4% by 2022. Central bank officials anticipate further hikes in 2023 and rate cuts beginning only in 2024. The Fed expects inflation to stay above the 2% target for at least the next two years.
In the post-meeting press conference, Fed Chair Jerome Powell reiterated that the central bank would act aggressively to bring inflation down. Powell added that the historical record high inflation cautions strongly against prematurely loosening policy, suggesting that the Fed will not pivot as soon as the economy starts to slow. This, in turn, pushed the yield on the benchmark 10-year US government bond to an 11-year high. Apart from this, the prevalent risk-off mood remains supportive of the ongoing USD rally to a 20-year high. The market sentiment remained fragile amid growing recession fears and was further hit by geopolitical risks.
In the latest development, Russian President Vladimir Putin announced an immediate partial military mobilization and threatened to use all the means to defend Russia and its people. This marks a further escalation in the protracted Russia-Ukraine war and tempers investors' appetite for riskier assets, evident from a sea of red across the equity markets. However, the GBP/USD pair manages to find some support ahead of the 1.1200 mark as the focus now shifts to the Bank of England policy meeting on Thursday. The UK central bank is expected to step up its efforts to curb inflation and deliver a jumbo rate hike at the end of the September meeting.
The markets are pricing roughly a 75% chance of a 75 bps increase. This, along with UK Prime Minister Liz Truss’s energy relief plan could help soften the economic downturn and lend some support to the British pound. The immediate market reaction, however, is more likely to remain limited amid looming recession risk, suggesting the path of least resistance for the GBP/USD pair. Hence, any attempted recovery might still be seen as a selling opportunity and risk fizzling out rather quickly.
Technical Outlook
From a technical perspective, the overnight decline confirms a fresh bearish breakdown through the lower end of a downward sloping channel from May 2022. That said, RSI (14) on the daily chart is already flashing overbought conditions and warrants some caution. Hence, it will be prudent to wait for some near-term consolidation or a modest recovery before considering any further depreciating move.
Any attempted bounce might now confront stiff resistance near the said channel support breakpoint, currently around the 1.1300 mark. The latter should act as a pivotal point for short-term traders, which if cleared decisively might trigger a short-covering rally. The GBP/USD pair could accelerate the momentum towards the 1.1375-1.1380 region, though any subsequent move up is likely to remain capped near the 1.1400 mark.
On the flip side, the Asian session low, around the 1.1220 region, now seems to protect the immediate downside ahead of the 1.1200 round figure. Some follow-through selling will reaffirm the near-term negative outlook and make the GBP/USD pair vulnerable to prolonging the downward trajectory.
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