- GBP/USD has gone into a recovery phase on Wednesday.
- The dollar stays on the back foot ahead of Fed's policy announcements.
- Brexit jitters could limit the pair's upside in the near term.
GBP/USD has turned north on Wednesday and managed to erase a portion of its weekly losses. The renewed dollar weakness ahead of the Federal Reserve's policy announcements fuels the pair's rebound but Brexit-related jitters could limit the upside in the near term.
The improving market mood on the European Central Bank's decision to hold an emergency meeting to address the fragmentation issues makes it difficult for the greenback to find demand early Wednesday. Reflecting the risk-positive market environment, the UK's FTSE 100 Index is up more than 1% on the day and US stock index futures are rising between 0.6% and 0.8%.
Meanwhile, after the UK government has revealed its plan to ditch parts of the post-Brexit deal on Tuesday, the European Union is reportedly looking to take legal action. Earlier in the day, EU Commissioner for Interinstitutional Relations and Foresight Maroš Šefčovič said that the UK had no legal nor political justification for the bill. In case political tensions between the EU and the UK continue to escalate, the British pound could lose interest.
In the second half of the day, the Federal Reserve will announce its monetary policy decisions. The bank is forecast to raise its policy rate by 50 basis points (bps) but markets are fully pricing in a total of 150 bps by July. Hence, there isn't much room for a hawkish surprise. Nevertheless, in case the Fed puts 100 bps hikes on the table for future meetings and unveils a plan to continue to raise rates, the dollar rally could pick up steam and weigh on the pair. On the other hand, a cautious Fed tone amid escalating recession fears could help the market mood remain upbeat and hurt the greenback.
GBP/USD Technical Analysis
The Fibonacci 23.6% retracement level of the latest downtrend aligns as the next recovery target at 1.2130. In case GBP/USD manages to clear that hurdle, additional gains toward 1.2160 (20-period SMA) and 1.2200 (psychological level, Fibonacci 38.2% retracement) could be witnessed.
On the downside, 1.2050 (static level) could be seen as first support before 1.2000 (psychological level) and 1.1935 (multi-year lows set on June 14).
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