The dollar is tensing up before the Fed
The greenback index has continued to fall following new data. It was last spotted at 101.50, down 0.45% for the day. With inflation still sky-high, the BoE is projected to tighten monetary policy next week, sending the GBP/USD up by 0.3% to 1.2504.
The ISM Services PMI rose slightly in April to 51.9 from 51.2 in March, indicating that business activity in the US service sector continued to rise at a moderate pace. This number was better than the market’s forecast of 51.8. The Prices Paid Index rose to 59.6 from 59.5, while the Employment Index fell to 50.8 from 51.3.
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On Wednesday, the Federal Open Market Committee (FOMC) is widely expected to vote to raise interest rates by 25 basis points (bps). Fed data show that the likelihood of a quarter-point raise has decreased to 87% since Tuesday’s high of 97%.
Inflation is still the keyword
Last week’s data showed prices in the United States remain sticky. PCE inflation data, the Federal Reserve’s preferred inflation gauge, came in higher than expected.
The US dollar might react differently if the Fed’s policy announcement signals that the rate rise in May would be the last one. However, March data showed UK inflation exceeding 10% for the seventh month in a row, lending support to the pound.
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This indicates that the Bank of England (BoE) may need to raise interest rates more than once to bring inflation to its knees in the United Kingdom. If this holds, it would be a positive for the British pound in the medium run. In addition, statistics from the UK’s largest mortgage lender, Nationwide, shows that UK home prices rose 0.5% MoM in April when a negative result had been forecast.
The outlook favors the bulls
Within the larger uptrend that started at the lows in September of 2022, the GBP/USD has been trading in a sideways range for quite some time. New highs were reached in the upper 1.25 in late April, and the general trend is still somewhat positive despite the choppy movement over the last several months.
The bulls are now in charge and will try to rack up gains as the dollar falls. The aim is resistance at 1.258 to 1.26 area. This would mean new cycle highs again.
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The bears have a long way to go. The pair, however, is fairly volatile, and we could see corrections toward the 1.24 support. This has been established and broken several times, and with the bulls cashing in, traders could revisit this area again.
GBP/USD 1D chart, source: tradingview.com, author’s analysis