GBP/USD price forecast ahead of the Fed and the BOE’s decisions

This week is full of important central banks’ decisions – the Fed, BOE, SNB, and BOJ are due in the next couple of days. On top of that, the ECB has announced an ad-hoc meeting today, sending the European equities and the common currency higher.

In times of uncertainty and the stock market declines, volatility tends to increase. And the US dollar firms.

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So did the US dollar against the British pound, despite the fact that the Bank of England was one of the first central banks to hike the interest rates in the current global tightening cycle. The GBP/USD is testing levels not seen since the aftermath of the Brexit referendum. So, where will it go from here?

1.20 provided strong support for more than five years

The GBP/USD pair has found support at the 1.20 area for more than five years. It tested the level multiple times, but at no point, the sentiment was so bullish for the greenback as it is now.

In the face of rampant inflation, investors have looked for safety in the world’s reserve currency. As such, the US dollar gained against all its peers – and even against the traditional safe-haven currencies (i.e., Swiss franc and Japanese yen).

A daily close below 1.20 should put more pressure on the GBP/USD because the horizontal channel forming in the past five years may be part of a bigger bearish pattern.

Bearish channel spells trouble for bulls

Every technical trader is familiar with the concept of a bullish and bearish flag. In this case, the horizontal consolidation resembles a bearish flag, and if the price breaks below the channel, then the US dollar may rally much more than the measured move suggested by the horizontal channel alone.

Fed expected to hike 75bp

The interest rate differential favors the US dollar too. Up until this Monday, the market expected the Fed to hike 50bp today and another 50bp at the next meeting.

But things took an unexpected turn when an article in the Wall Street Journal hinted that the Fed is considering a 75bp rate hike. Also, another 75bp might be in the cards for the July meeting.

BOE expected to hike 25bp

At the same time, the BOE is not in such a hurry to raise rates. Sure enough, a 25bp rate hike is expected tomorrow, but the interest rate differential strongly favors the US dollar.

As such, despite the fact that the GBP/USD is testing strong support, one should not be surprised to see it give way. Further US dollar strength is not only possible but probable.