Bullish Momentum is Losing Steam

The GBP/USD pair dropped as investors assessed the risks facing the American economy ahead of the Fed decision. 

• Sell the GBP/USD pair and set a take-profit at 1.2400.
• Add a stop-loss at 1.2570.
• Timeline: 1-2 days.

• Set a buy-stop at 1.2525 and a take-profit at 1.2650.
• Add a stop-loss at 1.2425.

The US dollar index bounced back as investors shifted to a risk-off sentiment following the collapse of First Republic Bank and after the weak US manufacturing output data. The GBP/USD pulled back to a low of 1.2500 as the US dollar index jumped to $101.87.

The GBP/USD pair dropped as investors assessed the risks facing the American economy ahead of the Fed decision. On Monday, we witnessed the second-biggest collapse of an American bank after First Republic reported billions of outflows.

On the same day, data by ISM revealed that the American manufacturing sector continued contracting in April. The ISM manufacturing PMI came in at 47.1 in April, as demand continued to struggle. A PMI reading below 50 is a sign that an industry is contracting. As a result, it has had the longest contraction since 2009.

Therefore, the Fed is between a rock and a hard place considering that inflation remains at an elevated level and the economy is ging through a period of stagflation. Further tightening could lead to more challenges for the economy.

Therefore, analysts expect that the Fed will hike interest rates by 0.25% and then pause the hiking cycle. The alternative is where the bank assesses the risks to the economy and then decides to leave rates unchanged. In a note, analysts at Bloomberg Intelligence said:

“Signs point to the FOMC raising rates by 25 basis points to 5.25% in the May 3 decision — despite ongoing turmoil in the banking system — and signaling that this will be the last hike for a while.”

The GBP/USD pair will react to the upcoming UK house price index (HPI) data by Nationwide. Economists expect the data to show that house prices dropped by 3.6% in April.

The GBP/USD pair drifted downwards after hitting a multi-month high of 1.2585 on Friday. It moved below the important support level at 1.2545, the highest point on April 14. The pair remains slightly above the important level at 1.2448 (January 23rd high). It remains above the 50-period moving average, which is a bullish sign.

Therefore, the pair will likely retest the support at 1.2448. A move below that level will signal that bears have prevailed, which will see it drop to the key support at 1.2400.