GBP/USD languishes in mid-1.2500s in holiday-thinned trade, as markets focus on Fed/BoE meetings

• GBP/USD is languishing in the mid-1.2500s with volumes thinned due to UK market closures and ahead of key BoE/Fed meetings.
• The bearish combination of a hawkish Fed plus less hawkish BoE/UK growth concerns means traders may continue selling rallies.

GBP/USD is languishing in the mid-1.2500s on Monday, with volumes thinned as a result of UK market closures and as traders braced ahead of key policy announcements from the Fed and BoE on Wednesday and Thursday. The Fed meeting is expected to be the much more hawkish of the two, with the US central bank expected to raise interest rates by 50 bps, signal more 50 bps hikes ahead and announce its quantitative tightening plans.

While the BoE might also outline quantitative tightening plans, it will likely only hike interest rates by 25 bps, and will probably further soften its tone on the need for further rate hikes ahead, given growing concerns about the state of the UK’s economic outlook. Indeed, these growing concerns about the UK economy have weighed heavily on sterling in recent sessions. This time two weeks ago, GBP/USD was trading comfortably above 1.3000, more than 3.5% higher versus current levels.

While concerns about the outlook for the UK economy amid the worst cost-of-living squeeze in decades, which has subsequently seen BoE tightening bets pared, has been a major driver of the recent drop, a broad strengthening of the US dollar has also been a key factor. Driving this strength has of course Fed hawkishness, but also concerns about geopolitics and China lockdowns, as well as general weakness in global risk assets, which spurred demand for the safe-haven buck.

This week’s central bank meetings and US data (the official April jobs report is out on Friday) may reaffirm the themes that have weighed heavily on GBP/USD in recent sessions and, as a result, traders may be looking to sell any rallies. 1.2600 looks to be a good area of resistance for now, though some technicians have also noted the 1.2670 area. After such a big move lower in recent weeks, expecting a further swift drop to 1.20 might be asking for too much in the near term. But short-term bears may well want to target a retest of last week’s lows just above 1.2400.