The GBPUSD exchange rate has retreated from previous highs amid market selling and a renewed bid for the US dollar after the Federal Reserve said it would leave the key interest rate unchanged at 5-5.25%. This was as expected, but further increases are necessary. GBP/USD's gains reached the 1.2700 resistance level, its highest in 14 months, before settling around 1.2640 at the time of writing.
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Overall, projections for the future path of interest rates as envisaged by the FOMC - known as a dot chart - showed that policy makers believe they will be required to deliver another 50 basis points to raise US interest rates by the end of the year. This could be seen as a surprise policy event as the markets were looking for a complete end to the cycle or a potential rally of an additional 25bps at most.
Commenting on this, Ian Shepherdson, chief economist at Pantheon Macroeconomics, explains, “The points for this year show that two members do not expect further hikes; Four expect one hike, nine expect two hikes, two expect three hikes, and the one who did not read the memo about the delays and cumulative policy impacts expects four.” Susanna Streeter, Head of Money and Markets at Hargreaves Lansdown, says: “The new dot plot has sparked a sell-off in equities on Wall Street with much enthusiasm subsiding recently, as investors evaluate the many hurdles ahead before an interest rate cut looms on the horizon. year 2024.”
Overall, GBP/USD hit a fresh 13-month high of 1.2699 in the run-up to the Fed's decision, but backed away from the initial decision and direction in price action that Sterling warned in a preview piece. Also according to the trading, the EUR/USD exchange rate was higher than 1.0863 before the decision, but it fell to 1.0809 in the aftermath.
The Fed said the decision to pause the rate hike cycle was necessary because time was needed to see the full impact of previous hikes on the economy. “Keeping the target range steady at this meeting allows the committee to assess additional information and its implications for monetary policy. When determining the stability of additional policy that may be appropriate to return inflation to 2 percent over time, the committee will take into account the cumulative tightening of monetary policy and the slowdown with which monetary policy affects economic activity and inflation.
However, Fed Chairman Jerome Powell said in his address to the media that the journey to reach the 2.0% inflation target still has some way to go, suggesting that this is not necessarily the end of the road for the rate hike cycle. Almost all policymakers thought some additional increases this year were "appropriate," Powell added.
This is a clear decline in market prices to start rate cuts as soon as the year is out and certainly by 2024; It is the communication that the Fed feels is necessary to ensure that credit conditions do not ease and stoke inflationary pressures. Inflation has been on a downward trend in recent months but the Fed views the situation as risky and will loath to send "crystal clear" for fear of undoing its recent work. Overall, the Fed's reticence to call for an end to the tightening cycle should help with some demand for the dollar, which has been under pressure for most of June.
Technical analysis of the British pound against the dollar:
- On the near term, according to the performance on the hourly chart, it appears that the GBP/USD is trading within a bullish channel formation.
- This indicates a significant short-term bullish bias in market sentiment.
- Therefore, the bulls will look forward to riding the current wave of gains towards 1.2682 or higher to the resistance 1.2719.
- On the other hand, the bears will target potential pullback profits around 1.2601 or lower at support 1.2562.
On the long term, and according to the performance on the daily chart, it appears that the GBP/USD is trading within a bullish channel formation. This indicates a slight bullish long-term bias in market sentiment. Therefore, the bulls will target long-term profits at around 1.2844 or higher at the resistance at 1.3069. On the other hand, the bears will target profits at around 1.2394 or below at the support at 1.2160.
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