The Federal Reserve has decided to pause its tightening cycle, holding interest rates steady at 5.00-5.25%. The central bank awaits more economic data before making further decisions on rate hikes. The Fed aims to strike a balance between curbing inflation and avoiding excessive economic strain.
In contrast to the Fed's pause, the Bank of England (BoE) is poised to continue increasing interest rates. This decision is driven by recent reports indicating high levels of inflation and robust employment figures. As a result, a policy divergence emerges between the BoE and the Fed, favoring the British Pound.
Analyzing the daily chart of GBPUSD, we observe a breakout above the 1.2680 resistance level, pushing the price towards 1.2850. However, this rapid and substantial rally has caused the price to deviate significantly from the blue 8 moving average. Typically, prices tend to consolidate or retrace towards the moving average before the next move. A support level for buyers could be found at the 1.2680 high.
Examining the 4-hour chart, we note that the price is currently finding support at the red 21 moving average. From a risk management perspective, buyers would be wise to await a pullback towards the 1.2680 support level. This zone offers additional confluence with the 38.2% or 50% Fibonacci retracement levels, the trendline, and the daily 8 moving average. Such a setup would provide stronger support and a better risk-to-reward ratio.
In the 1-hour chart, we observe the price bouncing off a previous swing low at 1.2767. By drawing a counter trendline, a descending triangle pattern becomes apparent. The price could break out in either direction, offering potential trading opportunities. An upside break may lead to another rally, potentially targeting the 1.30 handle. Conversely, a downside break could result in a retracement towards the trendline. Currently, it is a buyers' market, allowing sellers to either capitalize on a likely fall or wait for a break of the 1.2680 support and major trendline to target the 1.25 handle.
The policy divergence between the Bank of England and the Federal Reserve, as described in the news, has significant implications for the forex market, particularly the GBPUSD pair. With the Fed pausing its tightening cycle and the BoE expected to raise rates, market expectations and sentiment surrounding these central banks' monetary policies can greatly influence the GBPUSD exchange rate. Traders and investors closely monitor economic data releases, central bank decisions, and key events like the UK CPI report, Fed Chair Powell's Testimony, BoE policy decision, and US PMIs mentioned in the news, as these factors can impact forex market volatility and provide trading opportunities for those involved in the GBPUSD pair.