GBP/USD stabilises under 1.3100 pre-Fed minutes, with the bears eyeing a test of 1.3000

• GBP/USD has stabilised around 1.3075 and trades flat ahead of the release of Fed meeting minutes.
• The pair fell under 1.3100 on Tuesday following hawkish Fed commentary, highlighting the growing divergence in tone with the BoE.
• Some analysts are calling for a break below 1.3000 as this divergence between the banks further grows.

GBP/USD has stabilised around 1.3075, where it trades flat on Wednesday amid a subdued tone to broader FX market trade, with market participants opting to take a wait-and-see approach ahead of the release of Fed meeting minutes. Global equities have picked up where they left off with things on Tuesday and continue to press lower in wake of recent hawkish Fed speak from Vice Chairwoman Lael Brainard, and this is likely to weigh on risk-sensitive cable.

Market commentators have noted that the most recent hawkish remarks from Brainard, who is usually one of the Fed’s more dovish policymakers, highlighted the increasing divergence in tone between the Fed and BoE. Earlier in the week, BoE dove Jon Cunliffe (who was the lone voter against a rate hike at the bank’s last meeting) downplayed inflation risks and warned about economic weakness.

The upcoming Fed meeting minutes may well put this divergence in tone back in the spotlight, with some GBP/USD bears calling for a break below last week’s 1.3050 lows and a push towards annual lows at 1.3000. The pair actually already dipped underneath last week’s low earlier this session to hit 1.3045, but the move was short-lived with traders unwilling to overcommit pre-minutes.

Recent technical price action will embolden the bears; GBP/USD has in recent weeks been unable to sustain a move above its 21-Day Moving Average (now at 1.3125), sending a signal that the pair isn’t ready to break higher. Some FX strategists have called UK money market expectations for a further 140B bps in tightening from the BoE this year as overly aggressive and if this does start to get pulled back, the resultant downside in UK yields (at a time when US yields are rising), could be enough to send GBP/USD into the upper 1.20s.