Market analysis: GBP/USD not backing down despite rejection at 1.28

GBP/USD turned bearish on Wednesday after being rejected at 1.28 the day prior. It’s not the first time the pair has been rejected at that level which suggests it has become somewhat of a psychological barrier, at which buyers need to show increased commitment to overcome.

GBP/USD daily chart

(Past performance is not a reliable indicator of future results)

The reversal came in part due to the uptick in the US dollar, but other GBP pairs also struggled for momentum. Hawkish commentary from FOMC members has been reviving the rally in the dollar in recent weeks after struggling to catch bids for most of the past two months. Neel Kashkari, President of the Federal Bank of Minneapolis, said on Tuesday: ‘I don’t think anybody has totally taken rate increases off the table. I think the odds of us raising rates are quite low, but I don’t want to take anything off the table.’ This is just the latest of a list of comments from Fed speakers that have led markets to write off hopes for rate cuts this year. Rate cut odds have dropped from six 25 bps cuts in 2024 at the beginning of the year, to just one, now expected between November and December. But if data continues to show resilience, these odds will likely decrease further.

The realisation that the Federal Reserve was not going to start cutting as soon as the new year came around was the key driver behind the strength in the US dollar during the first four months of the year, as rate differentials played in favour of the US currency. But expectations of rate cuts have been pushed back elsewhere too, including in Europe and the UK. This led to re-adjusted rate differentials as overnight index swaps started to price out rate cuts from the ECB and BoE, weighing on the dollar and allowing the likes of EUR/USD and GBP/USD to recover some bullish momentum.

Looking ahead, the primary catalyst for USD pairs will be the PCE index data released on Friday. The figure is expected to remain mostly unchanged following its year-long trend but any surprises could create some volatility. Continued pushback in rate cut expectations in the US could solidify the reversal in the dollar, weighing on GBP/USD.

The pair seems to be holding onto some bullish appetite as Wednesday’s pullback deepened during the Asian session on Thursday but quickly reversed higher as traders came online in London on Thursday morning. GBP/USD is now contained just below the 61.8% Fibonacci (1.2718) awaiting further momentum to break higher. The current setup suggests the path of least resistance remains higher with any pullbacks expected to be technical corrections with limited uptake as long as the pair remains above 1.2643. Beyond this level, the ascending trendline from the April 22 and May 9 lows could offer support around 1.2620, before the next Fibonacci comes into play at 1.2588.