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GBP/USD: Facing critical resistance levels awaiting new catalysts

22nd May 24 8:28 am

The GBP/USD pair is holding onto small gains above 1.2700 in Tuesday’s trading.

Investors are awaiting new catalysts as several Federal Reserve officials and Bank of England Governor Andrew Bailey are scheduled to speak.

Recent Federal Reserve statements have affected expectations for interest rate cuts and triggered new advances for the US dollar.

I believe the British pound remains steady, trading just above 1.2700. The next movement in the GBP/USD pair will likely be guided by the UK Consumer Price Index (CPI) data for April and the minutes from the Federal Open Market Committee (FOMC) meeting in May, which will be released on Wednesday.

I believe investors are now looking for new signals regarding when the Federal Reserve (Fed) will begin cutting interest rates. They are awaiting the FOMC minutes to better understand officials’ views on policy regarding interest rate expectations.

UK inflation is expected to drop sharply in April, while Federal Reserve officials continue to support higher interest rates for an extended period. Therefore, I think the impact of the FOMC minutes on the markets might be minimal, as US inflation expectations have significantly changed since the last Fed meeting. Inflation fell as expected in April, indicating resumed progress in inflation control policies after failing to do so from January to March. Since the last Fed meeting was held before the latest inflation reading, it is expected that statements and projections from Fed officials regarding interest rates will be considerably hawkish.

Despite the decline in US inflation in April, Fed officials still seem to lack confidence that price pressures will sustainably return to the desired 2% rate. Yesterday, Federal Reserve Vice Chair for Supervision Michael Barr said, “Inflation in the first quarter was disappointing and did not provide the necessary confidence to ease monetary policy.” Barr pledged to allow more time for a tight policy stance to do its job.

Despite the pound’s rise, it is trading within a defined range and holding strong support at 1.2700 against the US dollar. The pound has performed strongly against all major currencies ahead of the UK CPI data for April. The UK’s Office for National Statistics (ONS) is expected to report a sharp drop in headline inflation to 2.1% from the previous reading of 3.2%. Core CPI, which excludes the most volatile items, is estimated to have slowed to 3.6% from 4.2% in March. Monthly headline inflation is expected to grow at a slower pace of 0.2% after a sharp increase of 0.6% in March.

I believe the expected decline in the UK inflation rate will increase investor confidence that price pressures are on track to return to the desired 2% rate. This would boost expectations for early interest rate cuts by the Bank of England. Currently, investors are divided between the June and August meetings when the Bank of England might start easing policy.

Expectations that the Bank of England might begin cutting interest rates in the summer, possibly before the Fed, have risen, driven by cautious remarks from Deputy Governor Ben Broadbent regarding interest rate expectations. Broadbent said, “If things continue to develop as expected – expectations that suggest policy should become less restrictive at some point – it is likely that the Bank Rate will be cut sometime during the summer.” This could create a gap between the policies of the Bank of England and the Fed, potentially causing significant fluctuations in the pair in the medium to long term.

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