GBP/USD rises to four-week high, anticipates BoE and Fed policy divergence

• GBP/USD rebounds from weekly lows to a four-week high of 1.2590.
• Swaps market pricing suggests a further 100bps hike by the BoE.
• Key events next week include UK labor market data, GDP figures, and US Fed monetary policy meeting.

GBP/USD climbed to a new four-week high at 1.2590 on Friday. However, it dipped toward the 1.2570s area after a softer-than-estimated Canadian jobs report cemented the case for a Federal Reserve skip in the upcoming monetary policy meeting. The GBP/USD is trading at 1.2576, up 0.14%, set to finish the week with gains of more than 1%.

Positive market sentiment and expected central bank actions favor GBP

Market sentiment is upbeat and pressures safe-haven peers, meaning the US Dollar (USD) trades soft. That, alongside central banks’ divergence between the US Federal Reserve (Fed) and the Bank of England (BoE), favors the Pound Sterling (GBP), with the GBP/USD bouncing from weekly lows of 1.2368.

Next week, Fed Chair Jerome Powell and his colleagues will reveal their fourth decision about monetary policy. The Fed is expected to keep rates at 5.00%-5.25% unchanged compared to May’s meeting, as policymakers would like to see the impact of 500 bps of tightening since March 2022. However, recent hawkish moves delivered by two major central banks that paused their tightening cycles opened the door for a possible hike.

The International Monetary Fund (IMF) urged the Fed and other global central banks to “stay the course” on monetary policy tightening as they scramble to temper inflation.

Aside from this, the UK dodged a recession projected by the Bank of England (BoE) yet is still battling stubbornly high inflation that peaked at 11.1% in October last year. Since then, it has retreated to 8.7%, urging the BoE to raise rates above comfortable levels.

That underpins the GBP/USD, which is set to test the 1.2600 figure, as the swaps markets currently pricing in the BoE will increase rates in the UK up to 5.50%, 100 basis points (bps) higher than current levels.

Upcoming events

Next week, the UK economic calendar will feature labor market data and the Gross Domestic Product (GDP) as the week’s highlights. Across the pond, the Federal Reserve (Fed) monetary policy meeting, the Consumer Price Index (CPI), and Retail Sales would update the status of the US economy.

GBP/USD Price Analysis: Technical outlook

Given the fundamental backdrop, the GBP/USD remains upward biased, set to test 1.2600, as the uptrend accelerates, as shown by the latest upslope trendline drawn from May 30 lows. If GBP/USD clears 1.2600, the May 11 high emerges as the next resistance at 1.2641, ahead of reaching the YTD high at 1.2680. The break above will expose 1.2700. Conversely, the GBP/USD first support would be June 2 high-turned support at 1.2544 before diving towards a broken resistance trendline and the 1.2500 figure confluence.