GBP to USD Forecasts: Bears Target $1.2350 on Monetary Policy Divergence

It is a quiet day ahead for the GBP/USD. There are no UK economic indicators for investors to consider, with the UK markets closed for Easter Monday.

The lack of stats will leave the US Jobs report and sentiment shift toward Fed monetary policy to influence. On Friday, the US Jobs Report fueled bets of a 25-basis point Fed interest rate hike in May, driving monetary policy divergence in favor of the Greenback.

While the UK economy has proven more resilient, dovish BoE commentary contributed to the divergence.

On Tuesday. MPC member Silvana Tenreyro talked about cutting rates earlier and faster. Tenreyro was also in focus on Wednesday, discussing the impact of a persistent rise in bank funding costs on the UK economy.

The dovish commentary contrasted with Fed chatter on Thursday. FOMC member James Bullard talked about inflation, saying,

“We’ve got a long ways to go, and I think inflation is going to be sticky going forward. It’s going to be difficult to get inflation back down to the 2% target… so we are going to have to stay at it in order to apply pressure to make sure inflation gets back down.”

GBP/USD Price Action

This morning, the GBP/USD was down 0.05% to $1.24047. A mixed start to the day saw the GBP/USD rise to an early high of $1.24340 before falling to a low of $1.24038.

Technical Indicators

The Pound needs to move through the $1.2419 pivot to target the First Major Resistance Level (R1) at $1.2448 and the Friday high of $1.24557. A move through the morning high of $1.24340 would signal an extended breakout session. However, the Pound would need dovish Fed chatter to support a breakout session.

In the event of an extended rally, the GBP/USD would likely test the Second Major Resistance Level (R2) at $1.2486. The Third Major Resistance Level sits at $1.2553.

Failure to move through the pivot would leave the First Major Support Level (S1) at $1.2381 in play. However, barring a Fed-off-fueled sell-off, the GBP/USD should avoid sub-$1.2350. The Second Major Support Level (S2) at $1.2352 should limit the downside. Third Major Support Level (S3) sits at $1.2285.

Looking at the EMAs and the 4-hourly chart, the EMAs send a bullish signal. The GBP/USD sits above the 50-day EMA, currently at $1.23969. The 50-day EMA pulled further away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A hold above the 50-day EMA ($1.23969) would support a breakout from R1 ($1.2448) to target R2 ($1.2486) and $1.25. However, a fall through the 50-day EMA ($1.23969) would give the bears a run at S1 ($1.2281) and S2 ($1.2352). A fall through the 50-day EMA would send a bearish signal.

The US Session

Looking ahead to the US session, it is a quiet day on the US economic calendar. There are no US economic indicators for investors to consider.

The lack of stats will leave the US Jobs Report and hawkish Fed bets to test buyer appetite for the GBP/USD. According to the CEM FedWatch Tool, the probability of a 25-basis point Fed interest rate hike in May rose from 48.4% (Fri) to 66.0% this morning.

However, investors should monitor Fed chatter on monetary policy and the US economy. Hawkish commentary would support the more hawkish bets on the Fed.