Whether this FX pair goes up or down is likely to depend on which central bank can convince markets that it’s got more rate hikes in store for 2023.
In recent sessions, GBPUSD has been relatively quiet, trading just below a key resistance level.
But such relative calm could be pierced this week as markets pit the policy signals out of two major central banks against each other:
First, a quick refresher on how FX markets tend to react to central bank policy moves.
Generally, the central bank that can keep raising its interest rates further while its economy can withstand those higher rates (relative to another central bank’s benchmark rates/economy) typically sees its currency strengthen.
And on that premise, GBPUSD has climbed by more than 2.5% so far this year.
The price consolidation seen in the above chart also suggests this FX pair’s next move may be a big one, depending on how the Fed and the BOE act over the coming days.
According to Bloomberg’s FX forecast model, there’s a 72% chance that GBPUSD trades within the 1.2182 – 1.2614 range this week.
Whether this FX pair (nicknamed “cable) goes up or down is likely to depend on which central bank can convince markets that it’s got more rate hikes in store for 2023.
Overall, the BOE is expected to hike by a larger amount compared to the Fed:
Depending on how much either central bank deviates from the above-listed scenario, that may well determine the size of GBPUSD’s move this week.
Overall, if the BOE confirms this week that it can officially out-hike the Fed, not just this week but also over the coming months, that could trigger the next leg up for GBPUSD.
The above scenario (dovish BOE + still-hawkish Fed) may then trigger GBPUSD into unwinding some of its recent gains.
At the time of writing, from current levels just below 1.24, Bloomberg’s FX model is pointing to a slightly likelier chance that GBPUSD would dip below 1.22 (16.5% chance) rather than breach the 1.26 mark (15% chance).
Amid rising expectations for heightened immediate volatility for GBPUSD, it’s increasingly evident that FX markets are on tenterhooks, eager to react to the latest clues out of the Fed and the BOE this week.
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Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets.