Pound extends losses to 4-week low

The US dollar has posted strong gains against the majors on Thursday, and GBP/USD has fallen 0.64% on the day, trading below the 1.34 line. It has been a dismal week for the pound, which has lost 1.29% in value.

Powell powers the US dollar upwards

The FOMC didn’t make any changes to policy at Wednesday’s meeting, but what the Fed said and didn’t say was enough to cause more volatility in the fragile financial markets. Fed Chair Powell didn’t make any commitments on the course of rate hikes, but signalled that they will arrive shortly. The markets continues to bet on a March lift-off, as the first rate hike appears to be a question of  ‘how much’ rather than ‘when’ – according to CME FedWatch, the likelihood of a 25-bps hike in March stands at 83%, with a 50-bps move priced at 16%. The Fed was also vague about a date for reducing the balance sheet, with the FOMC statement noting that it would start after the benchmark rate is increased. June is a likely date for the start of the reduction.

Overshadowed by the Fed meeting, US Advance GDP sparkled in Q4. The economy expanded by 6.9%, above the consensus of 5.5% and sharply higher than the 2.3% in Q3. The GDP Price Index came in at 7.0%, beating the forecast of 6.0%. The stellar data points to a strong US economy despite the Omicron wave and has contributed to the current rally by the US dollar.

The Fed has been walking a tightrope, trying to assure markets that it will wrestle inflation back below 2%, without being overly aggressive in tightening, which could cause a recession. The financial markets remain fragile, and Powell will have to tread carefully and communicate effectively if the Fed is to succeed.

The British pound is risk-sensitive, and the escalating crisis between Russia and the West over Ukraine has dampened risk and is weighing on the pound. UK Defence Secretary Ben Wallace, who will be travelling to Moscow, said on Wednesday that he was “not optimistic” about stopping a Russian invasion. If Russia does take military action against Ukraine, we would likely see investors  flock to the safe-haven dollar at the expense of the pound.

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GBP/USD Technical Analysis

• GBP/USD continues to break through support levels. The pair is testing support at 1.3377. Below, there is a monthly support level at 1.3276.
• There is resistance at 1.3503 and 1.3596

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