GBP/USD Daily Forecast – Renewed Dollar Weakness Fuels Sterling Rally

Fed Forward Guidance Puts Dollar Under Pressure

The Federal Reserve delivered another rate cut on Wednesday which was widely expected. However, a shift in forward guidance has led to a steady sell-off in the greenback.

There were two major changes in yesterday’s Fed communication. First, the central bank has indicated that it will not look to cut rates further. This could change down the road, but it would need to be justified by a significant shift in the economic outlook.

Perhaps a bigger takeaway was that the Fed will not be raising rates anytime soon. When policymakers delivered their first-rate cut earlier in the year, it was communicated as an insurance cut. Powell had commented at that time that prior rate hike cycles had seen a mid-cycle cut. As such, Powell attempted the portray the first cut as exactly that, an insurance policy in the middle of a rate hike cycle.

However, policymakers signaled yesterday that a notable improvement is needed for the central bank to start raising rates again. Essentially, this puts monetary policy in a neutral state. Further, it means that monetary policy could evolve in either direction at this point.

Technical Analysis

The recent rise in GBP/USD is attributed to the dollar which has been selling off against all of its major counterparts.

The US dollar index (DXY) has retreated back toward support that held it higher earlier in the month. DXY faces support from the 50-week moving average and a horizontal level. The index is currently making an attempt to break below its 200-day moving average.

We might see a bit of a dollar bounce considering the support in DXY, although GBP/USD has broken upward which suggests it is a buy on dips.

The main development that I am looking at is that it broke upward from a bullish flag pattern. The downward channel in the pattern had encompassed price action since the start of last week.

Further, the pair is trading above a horizontal level at 1.2924. I view this as the first level of support. Further support comes from the upper bound of the broken channel.

Bottom Line

• GBP/USD has extended higher on broad-based dollar weakness.
• The pair has broken higher from a bullish flag pattern.
• The first level of support falls at 1.2924.