Pound Sterling Pulls Back After US Bank Rescue Seals Fed Rate Hike

The Pound Sterling (GBP) continued bleeding against the US Dollar (USD) during the European session on Tuesday, as USD gained support from the news of the emergency rescue of First Republic Bank over the weekend. This calms markets and suggests the Federal Reserve is much more likely to hike rates at its meeting concluding Wednesday. 

From a technical perspective, the GBP/USD pair continues to pull back from new year-to-date highs in the 1.2580s formed on April 28 and forms a two-bar reversal pattern that bodes follow-through lower in the very short-term, though the overarching trend remains bullish. 

GBP/USD market movers

  • The US Dollar gains support from the news that JP Morgan has rescued troubled US regional lender First Republic Bank (FRB), as it will buy up FRB after fears it would be taken over by the Federal Deposit Insurance Corporation (FDIC) over the weekend. 
  • The US Dollar is still supported by high-than-expected PCE inflation data – the Federal Reserve’s preferred inflation gauge – after last week’s data showed prices remain sticky in the United States. 
  • Expectations have crystallized for a 25 bps rate hike by the Federal Reserve (Fed) at the upcoming FOMC meeting on Wednesday, May 3 – according to Feds Funds Futures data, probabilities for a quarter percent hike have risen from the 85% last week to 97% at the time of writing. 
  • That said, data for March showed UK inflation above 10% for the seventh consecutive month suggesting the Bank of England (BoE) is far from done with putting up interest rates. 
  • This contrasts with the US Federal Reserve (fed), nearing the end of its rate-hiking cycle. Therefore, the prospect of comparatively higher UK interest rates favors the Pound Sterling over the Greenback since it will attract more capital inflows.
  • GBP gains underpinning support from an unexpected MoM rise in UK house prices by 0.5% in April versus the negative figure expected, according to data from the UK’s biggest mortgage lender, Nationwide.  
  • Data from the Commodity Futures Trading Commission (CFTC) shows speculative investor flows have become increasingly supportive of the Pound over recent weeks, with non-commercial traders increasing their long bets above those of commercial traders who have been increasing short bets. 
  • JOLTS jobs report data for March, scheduled for release at 14:00 GMT, could impact the pair. After last month’s JOLTS release, the US Dollar declined as job openings fell from 10.4M to 9.9M.  

GBP/USD technical analysis: Correcting within an uptrend

GBP/USD has been a broad sideways trend since the beginning of the year, within a longer-term uptrend that began at the September 2022 lows. Despite recent volatile ups and downs, the pair made new higher highs in the upper 1.25s in late April, and the overall trend remains marginally bullish. Thus, Pound Sterling longs are marginally favored over shorts.

A pullback may unfold after a two-bar bearish reversal pattern formed at the recent highs. Two-bar reversals are fairly reliable patterns. A long green, a full-bodied candle that makes new highs as formed on April 28 is immediately reversed the following day by a long red-down candle of a similar length. They are bearish short-term signals. 

The two-bar pattern may now be followed by a leg lower, which could see GBP/USD retest the 1.2350 April-range lows. 

Given the dominant trend remains bullish-to-sideways, however, pressure to the upside is likely to re-emerge and could see the price recover and rally before breaking to fresh highs. 

A decisive break above the year-to-date 1.2583 highs of April 28 would probably lead to a continuation higher to the next key resistance level at circa 1.2680. 

Decisive breaks are usually characterized by moves that begin with a strong green daily bar that breaks above the ceiling or resistance level, with the price closing near the highs. Alternatively, three consecutive green bars form that break above the ceiling or resistance level. These confirm that the break is not a ‘false break’ or bull trap. 

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