GBP/USD Daily Forecast – Rally Gains Momentum on Divergence in Rate Cut Expectations

The emergency 50 basis points rate cut delivered by the Federal Reserve this week, to curb the impacts of the Coronavirus, caused a very brief reprieve in the markets. Risk appetite has quickly faded and expectations have grown for the Fed to cut rates further, potentially as much as another 50 basis points by the scheduled March 18 meeting.

The UK has signaled that it will act to support the economy from the impact of the virus, however, it has not cut rates this week which some analysts had expected.

Andrew Bailey, who will be replacing BoE Governor Mark Carney on March 16, opted to wait on further data to assess how the virus will impact UK citizens. Nevertheless, the futures markets continue to price in at least a quarter basis point cut at the March 26th Bank of England meeting and are indicating a one in three chance of a larger 50 basis point cut.

There are several unknowns at this stage. Namely, whether the BoE will cut 50 or 25 basis points, or even cut at all at its March meeting after Bailey’s comments this week. After all, if the intention is the reduce interest rates, why wait?

There is also the question of whether the Fed will reduce rates further after having delivered a larger than usual 50 basis points cut. The only certainty amidst all of this is that the markets are expecting more from the Fed than the BoE, which is underpinning the pound and putting continued pressure on the dollar.

Technical Analysis

GBP/USD has rallied to the psychological 1.3000 handle which has become an all too familiar price point in the first quarter of the year. On a weekly chart, the pair has erased losses from the prior week and is on track to print a reversal weekly candlestick pattern.

The 200-week moving average has been a hurdle since the pair fell below it in the first week of December. The pair currently trades a few pips from it and appears poised to test it. The weekly close in relation to the moving average will be important.

Horizontal resistance at 1.3050 appears to be significant as it served to reverse a recovery rally in the second week of February. The level is seen as the next upside hurdle for the pair.

To the downside, major support for the pair is found at 1.2961. It will likely take a sustained drop below it to shift the near-term bullish sentiment for the pair.

Bottom Line

• GBP/USD is set to post a fourth straight day of gains as the dollar continues to sell off on further easing expectations.
• The 200-week moving average is once again in play. The indicator has been a major hurdle since the pair dropped below it in early February.