GBP/USD in Peril after Strong NFPs & Dovish BoE

GBP/USD Analysis

The Bank of England stepped in to monetary easing earlier than the Fed, with a 0.25% cut, but did not follow through with another move last month and advocated for a "gradual approach" ^[1]. Its US counterpart however delivered a jumbo 0.5% pivot in September and pointed to an aggressive easing path ahead.

However, Fed Chair Powell sought to cool down market expectations with a more reserved speech last Monday. He warned that "this is not a committee that feels like it is in a hurry to cut rates quickly" and pointed to another 50 bps of cuts within the year ^[2]. The strong jobs report at the end of that same week extrapolated the messaging and markets now have priced out previously more aggressive bets for 75 bps of cuts. At the same time, BoE governor Bailey surprised markets with a dovish shift in his messaging. Speaking at The Guardian he said that policymakers could be "a bit more activist" in lowering rates ^[3], boosting market bets for a cut at the next meeting.

This shift in monetary policy dynamics led GBP/USD to its worst week of the year, with losses of nearly 2%. Crucially, it dropped below the EMA200 (black line) which negates the bullish bias and exposes it to the 38.2% Fibonacci. A breach would create risk for deeper correction, but sustained weakness is not easy.

The US Fed has laid out a much more clear and extensive easing path than the Bank of England, so the broader policy differential could still be supportive. Furthermore, the downside appears well-protected technically, with the daily Ichimoku Cloud and the ascending trend line form this year's lows. Above the pivotal 38.2% Fibonacci, GBP/USD can retake the EMA200 and control. Successful effort would keep the door open to new 2024 highs (1.3434), although gains are likely to be incremental form here on.