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GBP/USD falls after the Fed & ahead of the BoE rate decision

• Fed dampens expectations of a March rate cut
• BoE to leave rates unchanged
• GBP/USD trades in a holding pattern

GBP/USD is falling for a third straight day after the Federal Reserve interest rate decision and ahead of the Bank of England rate announcement.

The Federal Reserve left interest rates unchanged as expected at the 22-year high of 5.25% to 5.5%. Federal Reserve Chair Jerome Powell pushed back on the idea of a rate cut as soon as March.

Recent U.S. data has suggested that the Fed can wait longer before cutting interest rates and Powell was clear that a rate cut at next month’s meeting was not the base case. Traders are now pricing in the 38% probability the Fed will cut rates in March, down from 59% ahead of the Fed rate decision yesterday and down from 85% at the end of December.

Attention now turns to the Bank of England interest rate decision, where the central bank is expected to follow the Fed’s lead and leave rates unchanged at the 15-year high of 5.25%. Given that three policymakers voted for a rate hike in the previous session, and since then, inflation has ticked higher, the probability of a rate cut this month is very slim.

Instead, the focus will be on when the BoE could start thinking about cutting rates. Fresh projections will be published with the decision and could suggest the start of a slow pivot toward a rate-cutting cycle. Since the last round of projections in November, inflation has come in below forecasts, and economic growth has been weaker.
 

GBP/USD forecast – technical analysis

GBP/USD trades in a holding pattern since the start of the year, capped on the downside by 1.26 and limited on the upside by 1.28. The RSI is neutral at 50, giving away few clues.

A break-out trade would see sellers looking for a break below 1.26 to expose the 200 SMA at 1.2560 before bringing 1.25 into play.

A break out above 1.28 would bring 1.2830, the December high, into target and to create a higher high.

(Click on image to enlarge)

EUR/USD falls ahead of Eurozone inflation data

• USD rises to a 7-week high post Fed
• Eurozone inflation data is expected to cool to 2.8%
• EUR/USD trades in a falling wedge

EUR/USD has fallen to seven week low against the US dollar after the Federal Reserve interest rate decision and as attention turns to eurozone inflation data, which could weigh on the power further.

Expectations are for eurozone inflation to ease to 2.8% YoY in January, down from 2.9%, while core inflation is expected to cool to 3.2% YoY from down from 3.4%.

The data comes after price pressures in Germany and France, the Eurozone’s largest economies, eased by more than expected, raising expectations that the ECB could cut borrowing costs sooner. While there is still another inflation release to take into account before the March ECB meeting, a fall in January's CPI could raise confidence in forecasts that the central bank will cut rates as soon as April.

While the president of Germany’s central bank, Joaquin Negal, said that he was convinced that inflation has been tamed, ECB president Christine Lagarde has been more cautious, saying that the ECB still has more work to do.

Meanwhile, the US dollar trades at a seven-week high versus major pairs after Fed Chair Jerome Powell played down the need for a rate cut soon.

Attention now turns to US job data with the release of challenger job cuts and US jobless claims. Figures come after yesterday's ADP payroll rose came in below expectations at 107k, down from 158k, which could suggest that the US labor market is starting to weaken.
 

EUR/USD forecast – technical analysis

EUR/USD continues to trend lower from the December peak in a falling wedge, which is considered a bullish reversal pattern.

Any recovery needs to see buyers retake the 200 SMA at 1.0840 and 1.0890 the falling trendline resistance and weekly high. Above here, 1.0930 comes back into play.

Sellers need to take out the 100 SMA support at 1.0770 and 1.0730, a trendline dating back to September 2022. A break below here could open the door to 1.0650.

(Click on image to enlarge)

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