GBP/USD Advances on BoE Talk, USD Weakness

GBP/USD Analysis

Market expectations around the size of the Fed's next interest rate hike, have seen some volatility and sharp repricing after last week's hot inflation report, which showed headline CPI jumping to 9.1% rise and new four-decades high.

This caused markets to price in a more aggressive full percentage rate increase at the Fed's upcoming policy meeting next week. However, subsequent reserved commentary form prominent hawks, cooled down expectations, with CME's FedWatch Tool projecting a 0.75% rise with 66.8% probability, at the time of writing. ^[1]

St Louis Fed President Bullard and Governor Waller (both voters) backed such an adjustment last week, sticking the central bank's previously communicated path. ^[2], ^[3]

Today, Mr Saunders from Bank of England, who voted with the minority in favor of a larger 50 basis point hike last month, pointed to more hikes ahead. In his view, "some further monetary tightening remains likely in coming months", in order to bring inflation down to 2%. It needs to be noted, though, that Mr Saunders will be leaving the bank, after August's policy decision. ^[4]

The cooling of expectations around the Fed and the hawkish commentary from Mr Saunders have helped the pair build on Friday's gains, which now tries to take out 1.2000, with an advance of more than 0.5% today.

The pair now has an opportunity to push towards this month's highs, but we remain cautious around further strength and a catalyst will be likely needed for such a move.

Despite the relief rally that pauses the immediate downside bias, GBP/USD remains in a precarious position, as the Relative Strength Index (RSI) moves to oversold levels. As such, a return below the EMA100 (1.1880-90) is possible, although a drop below 1.1681 may prove elusive for now.

Caution is needed this week, since the economic calendar includes quite a few key economic release from the UK, including CPI Inflation, which can spark volatility and determine the Pounds trajectory.