GBP/USD Price Forecast: Pound Holds at 1.3450 as Fed-BoE Policy Divergence Supports Bullish Sentiment
By TradingNews.com Staff (original article credit to author at TradingNews.com)
The British pound continues to maintain firm footing against the US dollar, trading close to the 1.3450 level as of the latest session. Market participants have their eyes on a widening monetary policy divergence between the US Federal Reserve (Fed) and the Bank of England (BoE), which has kept the bullish tone alive for GBP/USD despite broader market uncertainties and recent fluctuations in global risk sentiment.
While both central banks have signaled intentions to tighten monetary policy, the pace and scope of expected rate hikes are diverging, giving the pound a comparative advantage. The following analysis breaks down the key drivers behind GBP/USD performance, evaluates economic and technical factors, and outlines what traders could expect in upcoming sessions.
Key Factors Supporting GBP/USD Stability
The resilience of GBP/USD around the 1.3450 level is not merely a short-term technical bounce but reflects deeper structural and economic developments. Here are the main factors currently underpinning the pair:
• BoE Hawks Fuel Rally:
– The Bank of England has emerged as one of the more hawkish major central banks.
– December’s surprise 15 basis point hike marked the start of the UK’s rate tightening cycle.
– Inflation in the UK continues to overshoot the central bank’s 2 percent target, prompting policymakers to suggest further hikes are likely in the first half of the year.
• Fed’s Dovish Wobble:
– While the US Federal Reserve has acknowledged rising inflation, its timeline on rate hikes remains more conservative compared to the BoE.
– Recent Fed minutes revealed members are still cautious about moving too quickly, contributing to a narrowing interest rate differential.
• Economic Reopening Tailwinds:
– The UK’s loosening of COVID-19 restrictions boosts the economic outlook for services, particularly hospitality and retail.
– Accelerated vaccine rollout and reduced hospitalization concerns related to the Omicron variant have raised expectations for an uninterrupted economic recovery.
• Market Technicals:
– Traders and technical analysts identify sustained buying interest at the 1.3400-1.3450 zone.
– The pair’s upward trend since the December low continues to show strength on key momentum indicators such as RSI and MACD.
GBP/USD Market Reaction and Sentiment
Momentum in the cable has gathered strength as institutional investors shift positioning in light of the evolving policy environment. A closer look at GBP/USD price action and sentiment reveals the following:
• Dip-Buying Strategy:
– Traders have consistently utilized dips below 1.3400 as buying opportunities.
– These retracements have largely been limited in scope, suggesting strong underlying demand.
• Options Market Bias:
– Risk reversals signal a moderate tilt toward GBP calls, suggesting investor appetite for upside exposure.
– Open interest in pound futures has also risen amid expectations that the BoE will outpace the Fed in tightening policy.
• Volatility Expectations:
– Implied volatility remains elevated due to geopolitical concerns and uncertainty surrounding global rate hike timing, but GBP/USD has seen relatively modest realized volatility in recent weeks, enhancing its appeal among carry traders.
Upcoming Data and Event Risk
Despite a broadly positive backdrop for the British pound, upcoming economic releases and central bank commentary could sway near-term price direction. Traders are advised to carefully monitor the following events:
• UK Inflation Data:
– The next Consumer Price Index (CPI) release will be closely scrutinized as a potential catalyst for a March rate move.
– Core inflation readings above 3 percent may increase pressure on the BoE to act sooner rather than later.
• US Non-Farm Payrolls:
– While labor market strength supports Fed tightening, any downside miss on employment numbers could dampen hawkish expectations.
– Wage growth figures will
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