GBP/USD, DXY Forecast: Two trades to watch

GBP/USD Recovers Ahead of BoE Decision, but Upside May Be Limited

GBP/USD has recovered from the two-month low of 1.3260 reached yesterday and is trading back above 1.3300. However, the recovery could prove limited given the broader fundamental backdrop.

Comments from President Trump regarding the reopening of the Strait of Hormuz have helped pull oil prices below $75 per barrel, prompting some profit-taking in the U.S. dollar following the overnight rally sparked by the Federal Reserve.

The Fed left interest rates unchanged but removed its easing bias. In addition, nine of the 18 policymakers now expect a rate hike this year, reflecting a hawkish tilt that could continue to support the U.S. dollar.

Attention is now turning to the Bank of England rate decision, where policymakers are widely expected to leave rates unchanged at 3.75% for a fourth consecutive meeting. The focus will be firmly on the vote split and any changes in the policy outlook.

The backdrop facing the BoE has shifted materially since its previous meeting. The U.S.-Iran peace agreement, falling oil prices, softer-than-expected inflation and signs of a cooling economy have all reduced pressure on policymakers to tighten policy further.

Oil prices are now around 30% below the levels seen at the previous BoE meeting, easing concerns over energy-driven inflation. Meanwhile, UK CPI came in at 2.8%, below expectations and below March's 3.3% peak. Inflation is also running below the Bank's February projections, giving policymakers greater flexibility.

At the same time, growth remains weak. UK GDP contracted by 0.1% in April and labour market conditions continue to soften, reinforcing the case for a cautious approach.

As a result, investors expect the BoE to leave rates unchanged today. The key question is whether softer inflation and weaker growth have persuaded some MPC members to abandon calls for further tightening, resulting in a more dovish vote split.

GBP/USD Forecast – Technical Analysis

GBP/USD faced rejection at the 200-day SMA and broke below its symmetrical triangle pattern, falling to a two-month low at 1.3260. Combined with an RSI below 50, the technical picture continues to favour sellers.

Bears will look to break below 1.3260, the June low, exposing the 1.3200 support level. Below here, the 1.3000-1.3200 support zone comes into focus.

Any recovery would first need to reclaim 1.3340 before bringing the 200-day SMA at 1.3420 into focus. Above here, the 50-day SMA at 1.3475 becomes the next target. A move above 1.3500 would improve the broader outlook and bring 1.3600 into view.

DXY at a 2-month high after a hawkish Fed hold

The U.S. dollar rallied sharply in the previous session, reaching a two-and-a-half-month high of 100.55 after the Federal Reserve delivered a hawkish hold.

While the dollar has eased slightly from those highs amid profit-taking and improving sentiment surrounding the U.S.-Iran peace agreement, the broader outlook remains supported by the Fed's shift in tone.

The Fed left rates unchanged at 3.50%-3.75% as expected and removed its easing bias. More significantly, nine of the 18 policymakers now expect a rate hike this year, highlighting growing concern over persistent inflation pressures.

New Fed Chair Kevin Warsh has also signalled a tougher stance on inflation and launched a review of how the central bank communicates policy, marking the beginning of a potentially more hawkish era for the Fed.

Markets have now fully priced in a Fed rate increase by October, supporting Treasury yields and underpinning the U.S. dollar.

DXY Forecast – Technical Analysis

The U.S. Dollar Index has recovered from the May low at 97.60, rising to a high of 100.57. The index continues to trade above its rising trendline, as well as the 20-day, 50-day and 200-day SMAs.

Combined with an RSI above 50, the technical picture remains supportive of further gains.

Buyers will need to break above 100.60, a level that capped gains in March, to target 101.00 and then 102.00, the May 2025 high.

Support can be seen at 99.50, where horizontal support, the 20-day SMA and the rising trendline converge. Below here, the 50-day SMA at 99.00 and the 200-day SMA at 98.70 come into focus. A break below these levels would expose the May 2026 low at 97.60.