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GBP/USD: Dovish Fed could pave the way for $1.45

Fawad Razaqzada Fawad Razaqzada 16/06/2021
GBP/USD: Dovish Fed could pave the way for $1.45 GBP/USD: Dovish Fed could pave the way for $1.45
GBP/USD: Dovish Fed could pave the way for $1.45 Fawad Razaqzada
  • Investors await FOMC decision
  • Are we in for a surprise or will it be status quo?
  • UK inflation hotter than expected
  • GBP/USD about to hit a new high for 2021?
The wait is finally over. It is decision time from the FOMC at 19:00 BST. Are we going to get any tapering hints, or will the Fed remain characteristically dovish?

The markets of stocks have pulled back a bit, although the major US indices remain within touching distance of their record peaks with both the S&P and Nasdaq 100 hitting new highs yesterday. There is very little doubt in stock market investors’ minds that the Fed will even start talking about tapering, let alone actually doing it, even if the imbalance between the US economy and Federal Reserve policy has grown sharply with inflation being at 5%.

The US dollar, meanwhile, remains stuck inside a tight range after it found some pockets of strength here and there. But with bond yields holing near recent lows and stocks near highs, the dollar’s recent strength looks like it is driven mainly by short-covering. I wouldn’t be surprised if it resumes lower in response to what I think will be a dovish Fed policy announcement.

Indeed, many market observers reckon Fed Chair Jay Powell may wait until the Jackson Hole summit in August to signal a reduction in bond purchases. Any hints of taper at today’s meeting would therefore come as a surprise, which could see the markets turn volatile. However, if it is status quo then we should see the dollar come under renewed pressure.

Still, with inflation running at 5%, unemployment rate at 5.8% and GDP projected at 6.4%, the Fed will have to convince some sceptics that they know what they are doing.

The central bank is likely to point to the potential for slower rate of growth, fading impacts from fiscal stimulus and supply adjustments in bottleneck sectors as the reasons why inflation will start to decline in 2020.
 
UK inflation hotter than expected

Meanwhile, a bit like the British weather lately, consumer inflation in the UK came in much hotter than expected, rising above the Bank of England’s 2% target. CPI easily beat expectation on both the headline (2.1% vs. 1.8%) and core (2.0% vs. 1.5%) fronts and the pound responded appropriately, rising against all major currencies. These figures are in line with stronger inflation data we have seen elsewhere, such as the US, which is partially driven by temporary factors and base effects. Still policymakers at the BOE will come under pressure if inflation turns out to be sticky.
 
GBP/USD heading to 1.45?

Given the hotter UK inflation data and optimism that we won’t go into further lockdowns amid vaccination success, the pound remains fundamentally supported. The GBP/USD pair may get a shot in the arm if the Fed turns out to be as dovish later on.

Technically, the trend is bullish as price rests on the rising trend line and comfortably above the 200-day moving average. Fresh buying momentum could come in if we see a breakout from the bull flag pattern to the upside. The next potential area of resistance comes in between 1.2200 and 1.2250, where the cable has previously struggled. Above this zone, there is clear blue skies until the next psychologically-important 1.45 handle, with some Fibonacci extension levels and round handles likely to provide interim resistance on the way to that target.

GBP/USD
Source: ThinkMarkets and TradingView.com
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Meet our contributors
Fawad Razaqzada
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Fawad Razaqzada
Market Analyst, London

Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms. He leverages years of market knowledge to provide retail and professional traders worldwide with succinct fundamental & technical analysis. Fawad also offers trading education to help shorten the learning curves of developing traders.
 
His colleagues consider him an expert at reading price action on the charts. This together with his deep understanding of economics and fundamental analysis, and trading experience, puts him in a great position to forecast short term price movements. Fawad covers a wide range of markets, including FX, commodities, stock indices and cryptocurrencies and his comments are regularly quoted by the leading financial publications such as Reuters and Market Watch. In addition to ThinkMarkets, Fawad also provides analysis and premium trade signals on his own website at TradingCandles.com.
 
 

Carl Capolingua
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Carl Capolingua
Market Analyst, Melbourne

Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions. Specialising in Australian and US stock markets in particular, Carl uses a top-down approach to assess the global macro picture before using both technical and fundamental techniques to select stocks. He regularly appears as an expert commentator on a number of media outlets throughout the Asia-Pacific region.
 
 
 

Kearabilwe
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Kearabilwe Nonyana
Market Analyst, South Africa

Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives. His career in the financial markets has seen him hold various positions in global investment banks and global CFD and Spread betting firms. He has deep interest in using quantitative methods to help him understand and teach the fundamental drivers of asset prices.
 
 
 

Fawad Razaqzada
Fawad Razaqzada
Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms.
Carl Capolingua
Carl Capolingua
Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions.
Kearabilwe
Kearabilwe Nonyana
Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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