GBP/USD Rally Gains Momentum as FOMC Minutes Takes a Dovish Tilt

KEY POINTS:

Most Read: GBP/USD Breakout Nears as Highs and Lows Compress

GBP/USD FUNDAMENTAL BACKDROP

Cable has rallied 230-odd pips against the greenback on the back of the FOMC minutes and improving market sentiment. GBP/USD reached a high of around 1.21100 in the Asian session before paring gains to trade around 1.20800 at the European open. The return of risk-on sentiment hints that the upside rally may not be done particularly if the pair can remain above the psychological 1.20000 level.

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Cable posted steady gains before the FOMC minutes release, partly attributable to Bank of England Chief Economist Huw Pill who confirmed the need for further rate hikes. Pill stated that inflationary pressures are becoming domestic while stating his decisions will be based on developments in the labor market. Pill further clarified that higher inflation usually leads to higher prices and higher wage demands which is in line with a recent Bank of England survey which showed companies are planning to increase both prices and wages moving forward. In a further boost for cable yesterday, Government borrowing came in lower than forecast for October due in large part to lower energy prices. Whether this decline in borrowing costs is sustainable will be interesting to monitor moving forward.

Thursday’s FOMC minutes revealed a dovish tilt, negatively affecting the dollar index and boosting overall market sentiment. There wasn’t much change in terms of the probability for a 50bp hike in December with the minutes revealing most members are in favor of slowing rate hikes soon. The biggest takeaway came in the form of the peak Fed funds rate expectations for 2023 with members apparently disagreeing on how high the Federal Reserve needs to go. The probability of the peak rate reaching 5.25% next year May declined by 10% in the aftermath of the release. The argument is that the effect of interest rate hikes on inflation is currently lagging with overtightening a concern for certain members. Markets interpreted the minutes as having a dovish tilt which saw the US dollar index nosedive toward last week’s lows.

US Dollar Index, Daily Chart- November 24, 2022

Source: TradingView

From a technical perspective, GBP/USD has reclaimed the 1.20000 level before reaching a high around 1.21000 overnight. Last week saw a spike above the 1.2000 handle before slipping back below to retest the support area around 1.17500. Price action has since printed a higher high and higher low with the next test for the pair being its ability to remain above the key psychological 1.20000 level which should keep the bullish momentum going. Given the Thanksgiving break in the US and the potential for thinning liquidity the pair could be in for further upside heading into the weekend.

GBP/USD Four-Hour Chart – November 24, 2022

Source: TradingView

Written by: Zain Vawda, Markets Writer for DailyFX.com

Contact and follow Zain on Twitter: @zvawda