GBP/USD price analysis: What is next after Fed and BoE?
16:14, 16 December 2021
Decisions at December meetings of the US Federal Reserve (Fed) and Bank of England (BoE) have established a fresh starting point for the GBP/USD currency pair, with both central banks committed to normalising monetary policy to counteract inflationary pressures.
The BoE unexpectedly lifted its main bank rate to 0.25% on 16 December, becoming the first major central bank to raise borrowing costs since the start of the Covid-19 pandemic.
The decision reignited investor enthusiasm in the British pound (GBP), resulting in a sharp upward shift in GBP/USD, with cable leading all G10 currency pairs intraday.
Meantime, the Fed announced plans to reduce asset purchases of Treasuries and mortgage securities in order to combat the recent rise of inflation.
Fundamentally, the short-term fate of GBP/USD will rely on which central bank, the US Fed or the BoE, will be more hawkish on the path of tightening monetary conditions. The Fed forecasts three rate rises in 2022, while the Bank of England signalled that "some modest tightening of monetary policy" is now warranted.
Technically, GBP/USD remains within the negative channel, although the cable might resume its upward trend if it overcomes resistance around the 1.3390-1.34 region. A failure to breach this resistance level, on the other hand, may result in more sidelined price actions with lower associated volatility.
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GBP/USD weekly chart
GBP/USD fundamental analysis
At their December meetings, the Fed and the BoE announced plans to take a more hawkish stance on their monetary policy normalisation in response to pressing consumer price inflation and despite short-term concerns over developments of the Covid-19 Omicron variant.
The Fed said that it will double the rate of tapering to $30bn monthly, up from $15bn, meaning that the process will conclude in March 2022, rather than May. Interest rate path projections (dot-plot) suggest three rises in 2022 and 2023, followed by another two in 2024.
The Bank of England raised interest rates by 15 basis points to 0.25 percent in an 8-1 vote, as the UK labour market continued to tighten and inflation remained more persistent than expected.
The UK consumer price index (CPI) increased to 5.1% year over year in November from 3.1% in September, and the BoE now anticipates inflation to continue around 5% for the bulk of the winter and peak at roughly 6% in April 2022. As such, the Bank concluded that some “modest monetary policy tightening” is likely to be required to bring inflation back to target in the medium term.
As seen by the market's first reactions, traders appear to view the BoE as having a more hawkish posture than the Fed, at margin, as evidenced by the movements of short-term yields. Following the meeting of the two central banks, the difference between the 2-year UK Gilt and the 2-year US Treasury Note narrowed by 8 basis points to -0.13 percent, with Gilt rates increasing and Treasury yields declining.
Investors should thus constantly monitor the short gap between Gilts and Treasuries, as it has been highly correlated with the performance of the GBP/USD over the last two months.
2-year Gilt/Treasury yield spread vs GBP/USD
GBP/USD technical analysis
Since May 2021, the GBP/USD pair has been moving within a falling channel and is currently trading in the channel's lower half.
As previously discussed here, GBP/USD is now seen to continue trading inside the channel as pound-related negative news, most notably a new pushback from the BoE against a rate rise, failed to materialise.
After hitting the oversold line on 8 December, the 14-day relative strength index (RSI) is presently pointing northward and ready to breach the 50 mark on the daily chart.
The 50-day simple moving average (SMA) is now at 1.3495, or 1% over today's price, while the 200-day SMA is at 1.3776, or 3% above current prices.
The next resistance level is located between 1.3390 and 1.3400, and a breakout of this level might increase the likelihood of an extension up to 1.36, around the channel's upper line. Profit taking might materialise here, making the channel upper breakout - with GBP/USD resuming its October highs – a less likely scenario in the very short term.
If the dollar returns to flex its muscles again, or if unfavourable news on the pandemic front erodes investors' risk appetite, the GBP/USD pair may pullback on resistance and trade more sidelined.
GBP/USD daily chart
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