During last week’s trading, GBP/USD rebounded sharply from its March 2020 lows and could look to extend its recovery in the coming days. A lot depends on US bond yields and the impact of statements from Fed policy makers and a looming wave of UK economic numbers. The GBP/USD price collapsed below the psychological support 1.2000, which was expected since it fell to the 1.2175 support. The currency pair has settled around the 1.2260 level since yesterday.

The British pound slumped briefly below 1.20 against the dollar last week only to rebound to the 1.24 level last Thursday when the Bank of England (BoE) announced the fifth rate hike since December. This was followed by a sharp rise in market expectations for the bank rate over the coming months. Sterling was also helped significantly when the US dollar fell in general almost along with US government bond yields in the wake of the US Federal Reserve’s monetary policy decision for June.

While the increasingly “hard” market expectations of UK interest rates could be discouraged by either the Bank of England itself or any number of economic numbers set to emerge from the UK this week, they have so far provided a significant boost to the rate of the pound against the dollar. The rising bond yields in Britain combined with falling US yields to raise the spread or gap between these yields in a supportive way for the pound after the Federal Reserve economic forecast in June indicated that the bank was likely to raise US interest rates only as much as financial markets had I did that. Already envisaged for this year.

Last week, the Federal Open Market Committee (FOMC) took another important step toward meeting the inflation target by raising the federal funds rate target by 75 basis points.

To the extent that the above trend in the bond market continues, sterling may help reverse some of the sharp decline in the second quarter.

However, the risk is that the US dollar strengthens regardless of what happens in the bond market this week if comments from Federal Reserve Chairman Jerome Powell on Wednesday and Thursday, or other members of the Federal Open Market Committee (FOMC), exacerbate emerging concerns about the possibility of a US or even global recession in the near future. This is a possibility given the extent to which the Federal Reserve and other global central banks are increasingly focused on curbing inflation to rule out all other concerns including the potential fallout for the labor and employment markets.

According to the technical analysis of the currency pair: The price of the GBP/USD currency pair lacks the strength factors to break through the general bearish trend. As I mentioned before, the continuation of the pessimism of the Bank of England and the negative results of the British economic data negatively affect any attempts of the GBP/USD to rebound to the highest and closest levels. The resistance for the currency pair is 1.2320 and 1.2400 and I still prefer to sell the currency pair from every bullish level.

On the other hand, the return of the sterling dollar price to the vicinity of the support 1.2175 will support expectations again to move towards the psychological support level 1.2000, thus increasing the strength of the downward trend.

GBP/USD made a solid rebound from the depths of its mid-month lows, but it may struggle for more momentum over the coming days. Major US economic reports capture the lion’s share of market attention in a period that will be quiet for them from UK economic calendar. The rebound gains for the GBP/USD pair stopped around the 1.2666 resistance level and settled around the 1.2650 level at the time of writing the analysis.

Last week, the British pound benefited from a broad decline in the US dollar, which kept the GBP/USD losses flat and short-lived even after the S&P Global Purchasing Managers Index surveys for May warned of tough times ahead for Britain’s most important services sector. Sterling’s recovery against the dollar was underpinned by the Treasury’s unveiling of a fiscal support package aimed at protecting retired families, the unemployed and other social welfare claimants from very high energy costs.

Since much of this targets welfare claimants for “tested means,” it is possible, if not likely that eligibility issues will also result in the exclusion or simply the exclusion of many low-income workers from such support, which could lead to continued risks to the economy and the pound later this year.

These will be headwinds over the medium term, while other factors are likely to dominate the GBP/USD rate this week.

It is not clear whether US factors such as declining market expectations for US interest rates and other recent international drivers, such as the increasingly broad easing of coronavirus containment measures in China, will remain supportive of the British pound and other currencies over the coming days.

Lee Hardman, currency strategist at MUFG, warns that the dollar could be weak for another corrective setback. The US dollar fell last week amid indications that large parts of the Chinese economy may be emerging from a hibernation caused by the Corona virus, and after some US economic data, including figures related to the service sector, housing market and business investment figures indicated the weakness of the economy.

The US data has encouraged speculation about a possible slowdown in the pace at which the Fed is likely to raise interest rates later this year, speculation that was substantiated to some extent by the minutes of the bank’s May meeting. The minutes suggested that some Fed policymakers might be open to the idea of ​​a pause in the “tightening cycle” if they receive “clear and convincing evidence” that US inflation is falling back to the Bank’s 2% target.

US inflation data is still a bit far from providing the “clear and convincing evidence” that is a prerequisite for any Fed decision to slow or pause the monetary tightening cycle, although that hasn’t stopped the market from pulling back a bit. about US interest rate expectations. The core PCE price index for April provided an additional indication last Friday that inflation pressures may ease, and this is the context in which the market is likely to assess this week’s US economic figures.

According to the technical analysis of the pair: There is no change in my technical view of the currency pair. On the daily chart below, the price of the GBP/USD currency pair started forming an ascending channel opposite to the broader bearish channel. As mentioned before, the breach of the 1.3000 psychological resistance will be important for a stronger and continuous control for bulls on trend. The current trend will continue to face a threat if the currency pair returns to the vicinity of the support levels 1.2490 and 1.2350, respectively.

I still prefer to sell the currency pair from every bullish level as the factors of the strength of the US dollar are continuing and may remain for a long time.

By simply observing the performance of the USD/JPY currency pair on the daily chart below, it seems clear that the currency pair breached the ascending channel. It pushed it towards its highest level in 20 years, as it fell to the 126.35 support level, the lowest in a month, before settling around the 127.00 level at the time of writing the analysis, before announcing the contents of the minutes of the last meeting of the US Federal Reserve.

Commenting on the performance of the US dollar. Just one week after the DXY rose to 105, BNY Mellon says that the strength of the US dollar is pending for the time being and “looks like it is ready to continue rising against most currencies”.

The dollar’s decline at the time released pressure on the British pound, the euro and the Japanese yen, both of which recovered from multi-year lows.

Why did the dollar’s rise stop?

BNY Mellon tells clients in its regular daily currency briefing that the expected interest rate differentials between different global central banks have stabilized for the time being, halting the bullish trend of the US dollar. The dollar benefited from a massive increase in US interest rate hike expectations thanks to the Federal Reserve’s guidance that a series of 50 basis points of rate hikes lie ahead. But this is now restricted in the value of the dollar and other central banks are catching up; Nothing more than the European Central Bank (ECB).

ECB Governing Council members were preparing the market for a rate hike in July, but it was ECB President Christine Lagarde’s intervention on May 23 that fueled the rally in July. In an unusual blog post, she said, a July rally would be appropriate while it is now very likely another rally by September.

As a result, the Euro rose sharply, and economists raised the ECB interest rate files accordingly.

Can the dollar setback continue?

However, the dollar did not appreciate as BNY Mellon says as analysts do not believe that the asset market volatility is complete, and this volatility is “usually a friend of the dollar.” Moreover, the market will start pricing in higher US yields as the Federal Reserve is expected to raise US interest rates. Accordingly, the bank’s analyst says, “The next phase of the dollar’s ​​rally may take some time to materialize. And we think it’s likely to be driven by another dose higher in the spreads.”

“We’ve been on the record that the Fed’s current pricing (which raised the fed funds rate to just above 3% late next year) is pretty shallow,” he adds. Indeed, BNY Mellon economists believe the US faces a persistent inflation problem heading into the second half of this year and into 2023, which will force a rethink of the course of policy. And they see the fed funds rate at 4% by this time next year, which is somewhat ahead of the market (current peak of 3.05% which is lower than it was as of May 06).

According to the technical analysis of the pair: The USD/JPY currency pair has breached the ascending channel, continuing its losses to the support level 124.95. Technical indicators will move towards oversold levels. I still prefer buying the currency pair from every descending level, as the variation in economic performance and the future of tightening central banks policy The world will be in favor of the US dollar in the end.

According to the performance on the daily chart, the resistance levels 128.20 and 130.00 will be important in returning strongly to the vicinity of the last bullish channel for the currency pair. The US dollar will react strongly today with the announcement of the minutes of the last meeting of the US Federal Reserve.