GBP/USD – Testing support ahead of Fed and BoE

Can it break lower?

The pound has been trending lower against the dollar since the Russian invasion of Ukraine as traders have sought the safety of the greenback in times of stress.

But what’s interesting in recent days is that while market sentiment has improved, the pair has continued to slide. And with it now approaching 1.30 – a major historical psychological barrier – ahead of both the Fed and BoE meetings this week, what’s next for the pair?

For a bit of context, both central banks are fully expected to raise interest rates this week and multiple times more this year. While the Fed is only just embarking on its tightening cycle, a 25 basis point increase this week would be the third consecutive hike for the BoE, with the previous two coming in December (15 basis points) and February (25 basis points).

The perceived hawkishness of both could be key in determining the path of travel for the pair over the course of the week, with the market’s pricing in at least five more hikes from the Fed and four more from the BoE this year (on top of this week). That and, of course, developments in Ukraine.

It’s interesting that, while 1.30 looks to be coming under some pressure at the time of writing, the momentum indicators on the 4-hour chart don’t really offer much confidence. The divergence we’re seeing suggests a breakout will be challenging and unless we see a shift in the MACD and stochastic, perhaps even vulnerable to a false breakout if it does move below.

The longer-term trend is clearly against it though and if we do see a corrective move, the key levels that stand out are obviously 1.31 and 1.32 being notable recent areas of support and resistance on the way down.

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