• A recent rally in GBP/USD has once again stalled after hitting a well-known technical barrier and Jerome Powell's sober assessment of the likelihood of rate cuts.
• GBP/USD's rebound attempts peaked at the 1.2870 resistance level and settled around that level at the time of writing, holding onto its recent gains of reaching its highest level in four months.

(Click on image to enlarge) 

This week, Jerome Powell spoke to US lawmakers and gave no clear indication that the Federal Reserve is ready to cut US interest rates in September. According to analysts, “Powell’s opening statement for his congressional testimony provides little evidence about the potential timing of rate cuts, with the main line being that the Fed is still looking for “more good data” to bolster its confidence that inflation will return to target.” 

Overall, the sobering message from the Fed Chairman has helped the US dollar, and the GBP/USD pair has fallen back below 1.28 levels. Looking at the charts, the pullback also coincides with some good resistance from a technical perspective. 

While a wide range of signals are consistent with further upside for GBP/USD in the near term, we note that anything approaching 1.2820 seems to be in the air. The pair do not tend to stay above these levels, allowing many in the market to reduce their exposure to the GBP/USD upside here.

Of course, the pullback is shallow, and another crack at the ceiling cannot be ruled out. In fact, our assessment of Powell’s testimony was more positive for GBP/USD, with Powell appearing to be preparing for a rate cut in September. Powell has indicated that the Fed is now shifting its focus to the labor market, where it must consider how higher interest rates could lead to unnecessary job losses. 

Powell had indicated that the Fed is now shifting its focus to the labor market, where it must consider how higher interest rates could lead to unnecessary job losses. Powell added in an opening statement to a two-day Senate hearing, "In light of the progress made in bringing down inflation and calming the labor market over the past two years, high inflation is not the only risk we face." Also said, "Tightening policy too late or too little could unnecessarily weaken economic activity and employment." 

In general, the Fed has a dual mandate to maintain stable inflation and optimal employment. That means there could be a payoff when it comes to interest rates: If you’re just watching inflation, you might cut rates after doing significant damage to the nation’s workforce. In short, we think the Fed is saying that it believes it can cut before inflation reaches its 2.0% target. “He’s a little bit more concerned about the potential costs of waiting too long to ease,” says Ian Shepherdson, currency analyst at Capital Economics.

Others, and perhaps the broader market, aren’t seeing such generosity, which may explain the support for the US dollar. Moreover, Carl Schamuta, senior market analyst at Corpay, says: “Fed Chair Jerome Powell avoided explicitly announcing a September rate cut, instead maintaining the careful stance that has characterized his comments over the past month,”  

He adds, “The dollar is slowly rising, Treasury yields are slightly higher, and stocks are modestly lower as traders gradually reduce the odds of a September rate cut,”  

Powell turned “excessively cautious” in his Senate testimony, according to Kyle Chapman, FX strategist at Ballinger Group. “Powell has disappointed market expectations — and mine — with a more dovish tone, and he doesn’t look like a man who is ready to cut rates in a couple of months.” Also, the first quarter has been spent fixating on bullish inflationary surprises over seasonal or temporary surprises. The analyst added, “The factors and maintaining a strong focus on interest rate cuts, and only now that the data is moving decisively in the right direction, is it emphasizing caution about not making progress in advance.”

Technical forecasts for the GPB/USD pair today: 

Based on the performance on the daily chart attached, the GBP/USD forecast is closest to the psychological resistance of 1.3000. Stability around the resistance of 1.2870 supports this, but the GBP/USD will need some momentum to take off. The closest currently is weak US inflation figures, which may weaken expectations for a tightening of the Fed policy. In contrast, the GBP/USD may be negatively affected if the US inflation figures come out stronger than expected.

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