GBP/USD challenges bearish bias after Fed and BoE decisions

GBP/USD Analysis

The Middle East conflict has sent energy prices soaring, sparking stagflation risks and complicating monetary policy. Even though only the RBA acted by delivering another rate hike, major central banks this week generally moved in a more hawkish direction.

The Federal Reserve kept rates unchanged at 3.50%-3.75% on Wednesday with only one dissenter in favour of a cut, down from two at the previous meeting, while acknowledging the uncertainty stemming from the ongoing conflict ^[1]. During his press conference, Chair Powell dismissed prospects of a rate cut unless progress on inflation is made, while the updated dot plot showed several members shifting from two cuts to one cut this year. However, the median rate projection was maintained at 3.4% ^[2], still pointing to one more cut this year and suggesting officials are inclined to look through a potentially temporary spike in energy prices.

The Bank of England was far more hawkish than its US counterpart. A typically divided committee delivered a unanimous hold while acknowledging that inflation "will be higher in the near term" and flagging risks of a price-wage spiral ^[3]. Furthermore, policymakers removed prior guidance for lower rates, stressing instead that they "stand ready" to act to ensure CPI stays on track to meet the 2% target. Still, officials may want to proceed with caution amid rising unemployment and an already fragile economy, with Governor Bailey warning against conclusions about rate hikes. ^[4]

GBP/USD jumped after the BoE out-hawked the Fed, which puts upward pressure on inflation and raises chances that the central bank's next move will actually be a hike. The pair is attempting to surpass the crucial resistance cluster provided by the EMA200 and a successful break would shift the bias to the upside, creating scope for further gains.

However, the USDOLLAR also received a boost after markets priced out any Fed rate cuts this year, while continuing to attract safe-haven flows amid heightened geopolitical and macroeconomic uncertainty. Moreover, monetary tightening is unlikely to offer a lasting appreciation opportunity for the pound, as it could further weigh on the economy and erode confidence. GBP/USD is already facing pushback at this crucial resistance cluster and a rejection would leave it exposed to new lows toward 1.3009.