GBP/USD sees establishment above 1.2500, Fed-BOE policy in focus

• GBP/USD has climbed above 1.2500 as the DXY loses strength.
• Investors are eyeing balance sheet reduction and further guidance from the Fed apart from the rate hike.
• The BOE is expected to raise its benchmark rates by 25 bps.

The GBP/USD pair has attempted a rebound from 1.2473 in the early Tokyo session and is looking to sustain above the psychological resistance of 1.2500. The cable has gained some strength as the US dollar index (DXY) is witnessing some stellar long liquidation after reaching elevated levels.

The DXY seems unable to recapture its 19-year high at 103.93 as clouds of uncertainty over the rate hike decision by the Federal Reserve (Fed) are fading away. A risk-on impulse is finding some attraction and risk-sensitive currencies are gaining momentum. The DXY has done a test below 103.50, at the press time and is likely to skid further. The extremely overbought situation in the momentum oscillators has supported the DXY bears to play the road, at least for a while.

On Wednesday, the Fed is going to elevate the interest rates by 50 basis points (bps) as per the market consensus but what seems more crucial for investors to focus on is the announcement of balance sheet reduction and guidance for the remaining five monetary policy meetings by the end of the year.

Volatility is going to stay longer this week as the interest rate announcement by the Fed will be followed by the Bank of England (BOE)’s monetary policy meeting. The BOE is expected to raise its interest rates by 25 bps. It is worth noting that the BOE elevated its benchmark rates by half a percent in March.