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GBP/USD 1.20 in focus ahead of central bank decisions

  • GBP/USD has been fluctuating within a wide trading range between 1.2000-1.2800 for the past five months, since the post-referendum (Brexit) breakdown to new, extreme lows in October.
  • Multi-decade lows around the major 1.2000 psychological support level have since been established in October and reinforced in January.
  • Since early February, GBP/USD has been drifting steadily downward, eyeing that 1.2000 target level once again, as the pound has been pressured in part by continued Brexit concerns while the US dollar has strengthened due to higher expectations of rising US interest rates.
  • Upcoming risk factors for the UK and sterling are considerable. Wednesday brings the UK’s annual budget release, which could pressure the pound if UK fiscal spending plans are seen as falling far short of US President Trump’s aggressive fiscal stimulus promises. Thursday of next week brings the Bank of England’s rate decision and policy summary, which could also drag on the pound if the central bank’s tone and policy reflect further concerns over the impending triggering of the UK’s separation from the EU (Article 50). The triggering of Article 50 itself later this month will also present major risk considerations for the pound.
  • On the other side of the pond, the US dollar has been in cautious strengthening mode since the beginning of February as Trump’s promises of fiscal stimulus and the Federal Reserve’s correspondingly hawkish signaling of higher interest rates have boosted the greenback against most of its major rivals. The US jobs report on Friday (expectations of ~185,000 jobs added in February) will have a critical influence on next week’s interest rate decision by the Fed. But the bar has likely been placed significantly lower for this particular jobs report since the likelihood of a Fed rate hike next week has recently risen to such a high level – well above 80% according to the CME Group’s FedWatch tool.
  • Amid the noted potential pressures on the pound and the ingrained support for the US dollar at the current time, the directional bias for GBP/USD continues to be bearish. From the current level around 1.2200, the noted 1.2000 support level remains the most important short-term target to the downside. In the event that the currency pair reaches down to 1.2000 again, however, a robust catalyst for further downside moves would be needed to break below the strong support established at that level.

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