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Jignesh Davda

Dollar Rallies as Fed Communication Disappoints

The markets were looking for a more dovish take from the Federal Reserve at their monetary policy meeting yesterday. This is evident by the recent rally to record highs in US equity indices and the price action in bonds and money markets.

Fed Chair Powell didn’t offer much in terms of forward guidance and opted to decide on the path of monetary policy at a later date, after reassessing further developments. This caused the markets to pare back expectations. and in the currency markets. that meant a rally in the greenback.

The US dollar index (DXY) rallied to fresh two-year highs, dragging GBP/USD lower with it. The currency pair had attempted to recover ahead of the meeting, but promptly erased losses as a result of the stronger dollar.

With the Fed meeting behind us, I do think we can see some more upside in the dollar. However, market participants are more likely to be focused on the Bank of England meeting that will take place later today in how they view GBP/USD.

The BoE is in a tough spot as economic data is steering them towards the direction of a rate increase while Brexit risks could open up the path to head in the opposite direction. With a newly elected Prime Minister in the UK, it should be interesting to hear how the central banks views have changed. In light of this, I expect a volatile reaction from the event.


Technical Analysis

There is a support level at 1.2150 that I have been watching over the past few days. Currently, the currency pair trades below it, but I would not read too much into that ahead of the BoE meeting.

GBPUSD Hourly Chart

If we get a rally from here, resistance at 1.2190 will tend to be pivotal. A break above it would expose yesterday’s high. Considering the events over the last 24 hours, I think it is safe to say that stops have accumulated above it.

While below 1.2150, I think there is some potential for a decline to 1.2000 in GBP/USD. Possible even this week if the BoE meeting causes a further selloff in Sterling.

Bottom Line

  • GBP/USD erased earlier losses as the dollar rallied broadly after the Fed meeting.
  • The upcoming BoE meeting will influence the direction from here.
  • While below 1.2150, the pair appears poised to test major support at 1.2000
  • A rally above 1.2190 can set the pair up for a broader recovery.
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