US Dollar Analysis: GBP/USD Has a Look Below 1.2850 Support Ahead of the Fed

US Dollar Takeaways

The market has priced in 99% odds of a 25bps interest rate hike from the Fed this week…but only about a 33% chance of another rate increase this year.
Traders will key into the FOMC’s monetary policy statement and Chairman Powell’s presser for market-moving tidbits about future policy.
GBP/USD is having a look below 1.2850 support – the rising trendline and 50-day EMA near 1.2725 could come into play next.

US Dollar Fundamental Analysis

It’s the season of paradoxes:

It’s the middle of summer, but parents are already planning for “back to school.”
The only movies that succeed in theatres nowadays are sequels, but “Barbenheimer” is dominating the weekend box office.
And there are three normally “high impact” central bank meetings, but every trader already “knows” what the Fed, ECB, and BOJ will do this week.

Keying in on the US central bank today, the CME’s FedWatch tool shows traders are pricing in a 99% chance that Jerome Powell and Company will raise interest rates by 25bps on Wednesday, as hinted around the June FOMC meeting and reiterated since:

Source: CME FedWatch

Assuming the Fed doesn’t want to upset the apple cart (and there’s no suggestion that central bankers do), the interest rate decision is unlikely to lead to much volatility in the market. That said, the communication around the decision will be closely scrutinized. At their June meeting, Fed policymakers implied that two more 25bps interest rate hikes were likely this year, but the market is skeptical; traders are pricing in only a 1-in-3 chance of another rate hike after this week’s (presumed) move:

Source: CME FedWatch

With no updates to the Fed’s economic forecasts scheduled, all eyes will be on any changes to the central bank’s monetary policy statement and crucially, Fed Chairman Jerome Powell’s press conference. If Powell hints at additional tightening in September or November, traders may adjust their priors, leading to strength in the greenback and weakness in equity indices. Meanwhile, a more balanced or outright dovish press conference could convince dollar bears and index bulls to press the markets further as the end of the most aggressive rate hike cycle in recent history may finally be at hand.

US Dollar Technical Analysis – GBP/USD Daily Chart

Source: TradingView, StoneX

As the chart above shows, US dollar traders aren’t particularly concerned about the Fed meeting. GBP/USD is trading at a two-week low under previous-resistance-turned-support at 1.2850, potentially opening the door for a deeper retracement toward rising trend line support and the 50-day EMA near 1.2725 if the Fed comes off as relatively hawkish. Meanwhile, a more dovish Fed statement and press conference could reinvigorate the GBP/USD uptrend; in that scenario, a move back above 1.2850 could open the door for a recovery rally toward 1.30 as the market-expected interest rate divergence between the two countries narrows.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.