GBP/USD and Sub-$1.13 in the Hands of the Federal Reserve

It is a relatively quiet Wednesday session for the Pound. Later this morning, CBI Industrial Trend Orders for September are on the docket. However, with the Bank of England focused on inflation and wage growth, the numbers would need to be dire to shift sentiment towards tomorrow’s BoE monetary policy decision.

This week, bets of a 75-basis point rate hike have spiked ahead of Friday’s mini-budget that could spur consumer spending and lead to a pickup in inflationary pressure. According to the money markets, the probability of a 75% rate hike sits at 75%.

Despite the shift in sentiment, monetary policy divergence remains in the dollar’s favor. The markets expect the BoE to fall short of 4% by year-end. By contrast, the markets have baked in a Fed move beyond 4%.

Economic conditions also favor the dollar, though the FOMC projections could change the dynamic later today.

With Monetary Policy Committee members preparing for Thursday’s policy decision, there are no MPC speeches to influence sentiment ahead of Thursday’s main event.

GBP/USD Price Action

At the time of writing, the Pound was down by 0.23% to $1.13535. A mixed start to the day saw the GBP/USD rise to an early high of $1.13848 before falling to a low of $1.13041.

The GBP/USD fell through the First Major Support Level (S1) at $1.1338 before finding support.

Technical Indicators

The Pound needs to move through the $1.1399 pivot to target the First Major Resistance Level (R1) at $1.1441 and the Tuesday high of $1.14606. However, any major GBP/USD moves will likely be on hold until the FOMC interest rate decision and projections.

The Fed would need to deliver a dovish rate hike to support a Pound move through $1.1450.

In case of a dovish Fed rate hike, the GBP/USD would likely take a run at the Second Major Resistance Level (R2) at $1.1503. A dovish rate hike could comprise a 75-basis point move and projections of 50-basis points or lower rate hikes in November and December.

The Third Major Resistance Level (R3) sits at $1.1606.

Failure to move through the pivot would see the Pound retest the First Major Support Level (S1) at $1.1338. In the case of a hawkish Fed and risk-off session, the Pound would test the Second Major Support Level (S2) at $1.1296.

The Third Major Support Level (S3) sits at $1.1193

Looking at the EMAs and the 4-hourly chart, the EMAs send a bearish signal. The GBP/USD sits below the 50-day EMA, currently at $1.14726.

The 50-day eased back from the 100-day EMA, with the 100-day EMA falling back from the 200-day EMA, delivering bearish signals. A GBP/USD move through R1 ($1.1463) would bring the 50-day EMA ($1.14726) and R2 ($1.1503) into play.

However, failure to move through the 50-day EMA would leave the Pound under pressure.

The US Session

It is a big day ahead on the US economic calendar. Early in the US session, existing home sales are due, though the numbers are unlikely to impact the GBP/USD. The market focus will be on the FOMC monetary policy decision and projections.

On Tuesday, the FedWatch Tool had the probability of a 75-basis point rate hike at 82% versus 18% for a percentage point move. It will come down to today’s decision and the projections. Any talk of a percentage point hike in November would likely drive the dollar and weigh on riskier assets.

This morning, the probability of a percentage point hike in November was just 11.1%, down from 13.1% on Monday and 15.3% a week ago. Beyond interest rates, there will also be plenty of market interest in the economic projections as recession fears resurface.