GBP/USD at a 6-week low after a hawkish Fed & ahead of the BoE rate decision

GBP/USD fell sharply on Wednesday and is holding those losses on Thursday, following the hawkish FOMC rate decision yesterday and ahead of the BoE rate decision today. The pair has fallen below 1.34, dropping to its lowest level since late July.

The USD has surged to a six-week high after the Federal Reserve hiked interest rates by 25 basis points, in line with expectations, to 3.75%–4%, citing persistent inflation and energy pressures.

The rate decision was unanimous, and policymakers were also supportive of further rate hikes before the end of the year.

The dot plot showed that 16 of the 18 policymakers were keen to raise rates again before the end of the year, with four of those seeing two hikes before the end of this year.

Growth and inflation forecasts were also revised higher. Federal Reserve Chair Kevin Warsh commented that the economy is resilient, but inflation is too high.

The market interpreted the rate decision as hawkish, lifting the U.S. dollar.

The hawkish message could be a sharp contrast to the Bank of England rate decision today.

BoE is expected to leave rates unchanged

The Bank of England is expected to leave interest rates unchanged at 3.75%, despite oil prices remaining above $100 a barrel and other major central banks hiking.

The BoE meeting comes as UK inflation rose to 3.1%, its highest level since March, but service sector inflation, an indicator of domestic pressures, remained unchanged at 3.4%, while core inflation was also unchanged at 2.6%.

Other data this week has also shown the UK labour market is weakening, helping to contain price pressures. That said, there are questions over how long the BoE can maintain its current stance, given surging petrol costs and rising food inflation.

The market is pricing in just a 30% chance of a 25-basis-point hike tomorrow, but this is up from less than 10% at the start of the week. A November hike is fully priced in.

The Bank of England is also expected to slow its QT programme, although Deputy Governor Dave Ramsden said that the impact of the central bank’s QT was background in terms of raising yields in the UK gilt market.

GBP/USD forecast – technical analysis

GBP/USD has broken down below its rising channel, falling aggressively below its 200 EMA and its falling trendline support. This, combined with the RSI below 50, keeps sellers hopeful of further downside.

Sellers will look to extend the downside towards 1.3340, ahead of support at 1.3275, the late July low. A break below here creates a lower low and brings the 1.3200 support zone into focus.

Any recovery needs to rise above the 200 EMA at 1.3425 and the 50 EMA and horizontal resistance at 1.3490. It will take a rise above 1.3500 to create a higher high, bringing 1.3650 into focus.