Trade Of The Week: GBPUSD – Battle Of The Hawks

If you are not afraid of volatility and want some action, then keep a close eye on the GBPUSD.

The week ahead promises to be eventful for the currency pair thanks to the Federal Reserve (Fed) and Bank of England (BoE) meetings.

Both central banks are aggressively hawkish and widely expected to raise interest rates this month to help tame inflation. However, the policy path beyond March may be clouded by the fog of war amid Russia’s invasion of Ukraine.

Before we discuss what to expect from the Fed and BoE, it is worth keeping in mind that the dollar has appreciated against every single G10 currency this month.

March has not been a kind month for the pound, which is down against all its major counterparts as of writing.

Given how our focus is on the Fed and BoE meeting, our trade of the week will be the GBPUSD which is down -3% in March.

The GBPUSD is heavily bearish on the daily timeframe as there have been consistently lower lows and lower highs. With bears recently securing a solid close below 1.3100, further downside could be on the cards.

What to expect from the Fed meeting

If you are based in the United Kingdom or European timezone, the Federal Reserve policy decision and press conference will be on Wednesday evening.

Markets widely expect the central bank to raise interest rates by 25-bps as Federal Reserve Chair Jerome Powell recently signalled. However, investors will be paying very close attention to the economic projections and press conference for fresh clarity on future rate hikes.

The conflict in Ukraine has left investors fearful over the US economic growth outlook and rising inflationary pressures. Nevertheless, US inflation hit a new 40 year high at 7.9% in February thanks to strong demand and supply constraints. It will be interesting to hear Powell’s thoughts on the current developments and how the Fed will navigate through this current storm.

King dollar is likely to appreciate if the Fed adopts an aggressive approach towards higher interest rates despite the geopolitical risks. If the central bank strikes a cautious tone with the economic forecasts downgraded, this could result in a weaker greenback.

How about the BoE meeting?

The Bank of England interest rate decision and meeting minutes will be released at 12:00 pm UK time on Thursday.

Earlier we highlighted how the BoE was widely expected to raise interest rates in the face of rising inflation. Indeed, consumer prices increased at an annual rate of 5.5% in January 2022, its highest level in 30 years.

But the central bank is expected to adopt a cautious approach towards higher rates beyond March amid concerns about the economic impact of Russia’s invasion of Ukraine. With no press conference or updated economic forecasts this week, all eyes will be on the BoE meeting minutes for clues on future rate hikes.

GBPUSD bears winning tug of war

Now, this is where things get interesting. If both the Fed and BoE strike a hawkish tone, the USD and GBP are likely to strengthen against each other. This could result in volatility and choppiness until one loses the tug-of-war.

When looking at the GBPUSD, prices remain heavily bearish on the daily and weekly timeframe. But the question that comes to mind is whether a technical bounce could be on the horizon? The pending central bank policy meetings will certainly influence the GBPUSD’s medium to longer-term trajectory. Focusing on key technical levels, a solid daily close below 1.3000 may open the doors towards 1.2900 and 1.2750. Should 1.2750 prove to be reliable support, this could provide a foundation for bulls to re-enter the scene.

We see a similar story on the daily charts with prices respecting a bearish channel. The candlesticks are trading way below the 50, 100, 200-day Simple Moving Average while the MACD trades below zero. The first level of interest can be found at 1.2900. A move back above 1.3100 could trigger an incline towards 1.3300.

GBP USD BoE G10 FED SMA CPI