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GBP/USD Technical Analysis: Signs of Instability

With investors leaning toward the Federal Reserve raising US interest rates by 25 basis points and fending off rising market expectations for a rate cut later in the year, developments could limit the potential for the pound to rise against the US dollar. The GBP/USD exchange rate has been volatile over the past 48 hours amid growing uncertainty among investors ahead of the Fed and Bank of England meetings.

With the US central bank raising interest rates by a quarter of a point as expected, the bulls of the GBP/USD pair found the opportunity to move upwards with gains that reached the 1.2335 resistance level, the highest it has been in nearly two months. It settled around 1.2280 at the time of writing, ahead of the Bank of England’s decisions.

The meetings come amid high inflation rates in both the United States and Britain, but signs of instability in the global banking sector may mean that policymakers are reluctant to raise interest rates further. GBP/USD rose to 1.2284 on Monday as investors cut odds of a Fed hike to 40%, according to money market pricing. But fast forward to Wednesday and those odds have recovered to more than 70% as investors become increasingly confident that authorities in Europe and the US have nibbled a burgeoning banking crisis in the bud.

Accordingly, the dollar rose after the news that the US government is now exploring ways to protect all deposits in any bank that may come under pressure in the future; Something that investors believe will allow the Federal Reserve to raise interest rates again. Meanwhile, US Treasury Secretary Janet Yellen said on Tuesday that overall outflows of deposits in fragile banks have stabilized, “we see that the situation has improved.” An improving mood and signals of an easing of pressures in the banking sector may allow the Fed to refocus its efforts on fighting inflation again.

The rising odds of a Fed hike sent the yield being paid on US government bonds higher, which in turn boosted the dollar and GBP/USD dropped below 1.22. But hotter-than-expected inflation data released from the UK on Wednesday later gave UK yields, and the British pound, a boost.

Gains are likely to be limited if the Fed commits markets to a 25 basis point hike and says further hikes are likely.

  • The GBP/USD price is heading higher with its higher lows connected to an upward trend line on its hourly time frame.
  •  The pair is in the midst of a correction to this support area.
  • The Fibonacci retracement tool is showing where buyers might be looking to jump in.
  • It looks like the 38.2% level around 1.2190 has already attracted enough buyers to bring GBPUSD back to a swing high near the key psychological level of 1.2300 or higher.

A larger decline could still be at 50% at 1.2157 or 61.8% Fibonacci at 1.2125 near the 200 SMA dynamic support.

On the subject of moving averages, the 100 SMA is above the 200 SMA to confirm that the overall near-term trend has turned bullish or that the support is more likely to hold than to be broken. Stochastic is also heading higher, so price may follow suit while bullish pressure continues. The oscillator has plenty of room to move higher before reaching the overbought zone to reflect exhaustion among the buyers. The RSI is also pointing higher to show that buyers are in control and have a floor to cover before signaling overbought conditions.

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