Here is the GBP/USD's Potential Playbook As FOMC Decides

Summary:

The GBP/USD looks vulnerable ahead of the FOMC decision, with the mention of tapering of the QE program expected to put bearish pressure on the pair.

The GBP/USD is one of the currency pairs in focus as the Federal Open Market Committee (FOMC) of the US Federal Reserve Bank decides on its monetary policy direction today.

The GBP/USD has been facing significant headwinds of late. In early April, rising bond yields allowed the greenback to gain ground against the cable and other majors. This dollar strength soon waned when several FOMC members downplayed the possibility of an early rate hike. However, the Bank of Canada started tapering its QE program and this has woken the market to the possibility of similar actions from other central banks. The Fed would have to take cognizance of the great improvement in the US economy. The jobs reports in the last two months have been great, PMI numbers are picking up and jobless claims are now at their lowest in one year.

Tapering has to precede rate hikes. Even if the Fed is hesitant to start raising rates early due to inflation staying well below the flexible 2% benchmark, the bank may decide to start tapering soon, or at least to make a mention of it and provide some kind of timetable for its commencement.

This is what markets a watching for in today’s rate statement. The FOMC Chairman’s press conference may also reveal more information in this regard, especially when providing unscripted answers to journalists’ questions.

Technical Levels to Watch

The pair’s performance on the daily chart reveals price compression with progressively lower highs. The active daily candle is testing the ascending trendline at the 1.38616 horizontal support level. If the FOMC decision favours USD strength via a mention of an early tapering of the QE program, then we could see a breakdown of this level, which brings 1.38126 into view as the next potential downside target. A further decline also puts 1.37463 into focus, along with 1.36771 and 1.36117 as additional downside targets.

On the flip side, a bounce on the current support could follow if the FOMC defers the tapering of its QE program and reasserts the 2023 take-off date for possible rate tightening. This bounce brings 1.39484 into focus as the initial upside target, followed by 1.40051 and 1.41535 as additional targets to the north.