GBP/USD Daily Forecast – British Pound Rallies for Three Consecutive Sessions

Is Fed Chair Powell Sending a Dovish Signal?

Fed Powell’s speech yesterday has led to a lot of speculation that the central bank is on the verge of cutting rates. My view differs from this somewhat.

Indeed, Powell discussed trade tensions, but I think this was taken out of context. My main rationale being that he only allocated one paragraph in a nine-page speech to discuss the ongoing trade war. The way I see it, he acknowledged the issue and reaffirmed that if it were to have an adverse impact, the Fed would react.

This is hardly a strong signal that the central bank is ready to take action.

Powell discussed downside risks that are becoming increasingly apparent as a lack of upward pressure on inflation. Similar to the stance on trade, I think the Fed will act if need be, but likely not anytime soon.

This is mostly because Powell emphasized that inflation can be a problem if it were to tick lower and remain there on a persistent basis. The emphasis here is on ‘persistent’.

Also, the rhetoric seems to suggest that the Fed may look at quantitative easing prior to cutting rates. If the Feds moves forward with starting new asset purchasing, then I think that is a time to start considering whether a rate cut is not too far behind.

The dollar did not have a significant reaction to Powell’s speech, but the greenback remains under pressure. While I don’t think Powell provided a catalyst for renewed weakness in the dollar, I think it’s important to be mindful of trends and momentum.

Technical Analysis

For GBP/USD, the trend remains to the upside, at least in the near-term. The pair is attempting to post a fourth consecutive day of gains, and is bid firmly in early trading.

In yesterday’s daily forecast, I discussed the uptrend and the rising trend channel that has encompassed price action. This trend remains intact with a test of the lower bound at the start of European trading today.

The chart above shows that the pair is on pace to close an hourly candle near weekly highs, which would result in an evening star pattern. This pattern would reaffirm the uptrend if it were to print.

On a 4-hour chart, however, I see some resistance coming into play from the 100-period moving average. This indicator has not been tested since the pair fell through it in mid-May.

Bottom line:

• Although the trend and momentum are to the upside, I would not try and front-run a break of the 100-period 4-hour moving average.
• If it does get above there, the next main resistance falls at 1.2744. The 4-hour chart clearly shows the relevance of the level.
• It will take a break below the trend channel and horizontal support at 1.2694 to signal a trend reversal.