GBP/USD retraces below 1.2800 on a strong USD, ahead of Powell testimony, BoE’s decision

• Strong US Dollar, driven by expectations of further tightening by the US Federal Reserve and an overbought US equity market, has influenced the movement.
• Fed Chair Jerome Powell’s upcoming testimony at the US Congress could further influence the USD, with potential bullish or bearish implications.
• Markets expect the BoE to raise rates by 25 bps on Thursday, which can potentially underpin the GBP/USD toward 1.30, especially if inflation data comes hot.

GBP/USD retraces after hitting a new year-to-date (YTD) high of 1.2848 in the last week, down 0.34% back at the 1.2700 handle, amidst a strong US Dollar (USD). Expectations for additional tightening by the US Federal Reserve (Fed) and an “overbought” US equity market dampened investors’ mood. At the time of writing, the GBP/USD is trading at 1.2755 after hitting a high of 1.2806.

Potential for further tightening by US Federal Reserve and overbought US equity market affecting GBP/USD

In the last week, the Fed held rates unchanged at their June monetary policy but upward revised peak rates at 5.6%, according to the dot plots. That strengthened the US Dollar, which was hurt by Fed Chair Jerome Powell, who struck a neutral tone, disappointing USD bulls, so the GBP/USD continued towards its YTD high. But last Friday, hawkish comments by Fed Governor Christopher Waller and Thomas Barkin weighed on traders after Monday’s holiday in the US.

Notably, the CME FedWatch Tool shows traders seeing a 74% chance of a 25 bps increase to the Federal Funds Rate (FFR) in June, but toward the end of the year, money markets do not believe the Fed would raise rates any further the 5.25%-5.50% area.

Meanwhile, Fed Chair Jerome Powell’s testimony at the US Congress on Wednesday and Thursday is expected to keep the press conference tone. Any hawkish surprises could bolster the greenback, while dovish hints could damage the already battered US Dollar.

Aside from this, the Bank of England (BoE) is expected to raise rates on Thursday, with markets pricing in a 25 bps hike. A day earlier, inflation data in the UK would be revealed, with expectations leaning toward a slowdown in headline and core Consumer Price Index (CPI) in yearly and monthly readings. Upward surprises could further cement market participants’ expectations that the BoE would raise rates by 100 bps toward the end of 2023. That should be positive for the GBP/USD, with traders looking for a reason to challenge the 1.30 figure.

Data-wise, the US economic docket revealed that Housing Starts jumped to a 13-month high, as shown by May’s data revealed by the US Commerce Department. Housing Starts rose by 21.4% MoM, crushing the prior month’s plunge of -2.9%, while Building Permits expanded by 5.2%, above -1.4% contraction in April.

GBP/USD Price Analysis: Technical outlook

The GBP/USD remains bullish-biased, though the pullback from YTD highs fell shy of testing the May 10 high at 1.2679. GBP/USD’s retracement was sponsored by the Relative Strength Index (RSI) getting out of overbought conditions, while the three-day Rate of Change (RoC) turned negative after eight days of positive readings. The GBP/USD reached the 38.2% Fibonacci Retracement at 1.2711 before settling around current levels. Therefore, the GBP/USD first resistance would be the 1.2800 mark, followed by the YTD high at 1.2848. A breach of the latter will expose 1.2900. Conversely, a drop below 1.2713, and the pair could fall to the 1.26 handle.