- GBP/USD is slightly higher on Tuesday and is trading at the low 1.2500 following the return of UK market participants.
- But the pair remains range bound at 1.2400-1.2600 ahead of key Fed and BoE meetings this week.
- Analysts warn of downside risks for the pair as a result of the policy divergence between the Fed and the BoE.
The return of UK market participants after a long weekend has not translated into a substantial pick-up in sterling volatility. As currency markets brace for key Fed and BoE policy announcements this week, plus a flurry of top-tier US data releases, the GBP/USD trades within intraday ranges of 1.2470-1.2600 on Monday.
At current levels in the 1.2520s, the pound is trading roughly 0.3% higher, with some citing a rise in UK long-term yields following the reopening of UK bond markets on Tuesday as moderate support. . Techs have pegged last Friday’s highs just above 1.2600 and last Thursday’s multi-month lows just above 1.2400 as the range that the GBP/USD pair is likely to be capped in the run up to the event risk this week.
FX strategists have warned that the policy divergence between the Fed and the BoE means GBP/USD faces downside risks this week. The Fed is expected to raise interest rates by 50 bps on Wednesday, signal that rates will hit roughly 2.5% by the end of the year, and announce quantitative tightening plans, and many think that all this hawkishness will offer more support to the US dollar, which is already very strong.
Meanwhile, with the BoE much more concerned about UK economic weakness as consumers suffer amid the worst cost-of-living contraction in decades, analysts are betting on a more modest 25bp rate hike and a more dovish tone on the need for future rate hikes. A break below 1.2400 due to policy divergence could see GBP/USD extend lower to test June 2020 lows at 1.2250 area.
Technical levels
Source: Fx Street
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