GBP/USD retreats as the divergence between Fed and BOE widens

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Dec 2, 2021
  • The GBP/USD has been in a major bearish trend.
  • The trend accelerated this week after the hawkish statement by Jerome Powell.
  • We explain the rising divergence between the Fed and the BOE.

The GBP/USD has been under pressure for the second straight week as investors price in a bigger divergence between the Federal Reserve and Bank of England (BOE). The pair is trading at 1.3310, which is a few points above this week’s low of 1.3195. 

BOE and Fed divergence

The biggest mover of the GBP/USD pair this week has been the relatively hawkish tone by Jerome Powell, the Federal Reserve chair. In a testimony in congress, the Fed Chair said that the bank will talk about tapering in the coming meeting. 

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This means that the Fed will likely continue to accelerate the pace of tapering and possibly end it in the first quarter of 2022. The sentiment has been supported by several Fed officials like Mary Daly, Raphael Bostic, and Richard Clarida.

In the same testimony, the Fed Chair and Treasury Secretary, Janet Yellen, announced that they will drop the term that inflation is transitory. This happened as recent data showed that the country’s inflation jumped to the highest level in more than 30 years.

The GBP/USD has lagged as investors question whether the Bank of England (BOE) will deliver a hawkish tone later this month. Before the Omicron variant, all indicators were that the bank would embrace a hawkish tone in this month’s meeting. 

Besides, recent numbers like inflation, unemployment rate, and the housing market have been relatively strong. Inflation has risen to the highest level in more than a decade.

However, with the new Covid-19 variant spreading, there is a likelihood that the bank will embrace a wait and see attitude. In a note, a Bloomberg economist noted:

“The central bank will be watching closely for any science that sheds light on how effective the current vaccines are at preventing severe disease. If the news is positive, it may still be minded to tighten later this month.”

GBP/USD forecast

GBP/USD

The daily chart shows that the GBP/USD pair has been in a major sell-off in the past few months. The pair has managed to move below the 23.6% Fibonacci retracement level. It has also dropped below the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved in a bearish trend.

The GBPUSD price also moved below the key support at 1.3412, which was the lowest level on September 29. Therefore, the pair will likely keep falling as bears target the key support level at 1.3400.

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