GBPUSD Daily Forecast – Pound Consolidates After a Steep Drop

Market’s Await Fed Decision

While much of the roughly 2.5% drop seen over the past three days is attributed to Brexit risks, the markets will shift focus to the Fed in the session ahead.

The Federal Reserve is widely expected to cut interest rates for the first time in over ten years today. Analysts, as well the futures markets, are looking for a quarter basis point cut. However, there has been quite a bit of speculation over the past few weeks that the central bank may look to ease in a much more aggressive manner.

The dollar reaction will tend to be based on forward guidance from the Fed. As most of the major data releases since the last meeting have surpassed analyst expectations, I think the Fed can go either way in communicating expectations for monetary policy down the road.

Fed decisions are always difficult to predict, but if I were to speculate, I think the Fed will cut a quarter basis point as expected. Beyond that, I don’t think they will send a strong signal for further rate cuts. Rather I expect them to retain a data-dependent stance. It seems very likely that the Fed will reiterate that they will act as necessary to sustain the economy.

Ahead of the Fed meeting the economic calendar is quite light. Reported earlier today, nationwide house prices in the UK rose 0.3% in July which was a tick above the analyst estimate. Later in the day, the ADP will release their jobs report which should give some insight on the US labor market ahead of the Fed meeting.

Technical Analysis

GBP/USD has fallen into a consolidation at support found near 1.2150. This same area offered support in late 2016 and early 2017 on several attempts. It seems likely that the pair will try to hold near this level into the Fed meeting.

Volatility is expected during the Fed decision. For this reason, I can see GBP/USD testing the psychological 1.2000 handle if it were to break below support. That level should trigger some profit-taking and entice buyers considering the psychological properties of it.

To the upside, I see resistance at 1.2300 in the event of a rally. GBP/USD is in a clear technical break down, although the pair is quite oversold. This should keep the pair under pressure on rallies. However, the near-term direction will be influenced by the Fed later today.

Bottom Line

• GBP/USD has tumbled without much of a move in the dollar. This stands to change as the Fed is scheduled to deliver a statement and press conference later today.
• Support at 1.2150 as been holding the pair higher, a break could see the pair declining to 1.2000.