Bullish view

• Set a buy-stop at 1.2827 and a take-profit at 1.2900.
• Add a stop-loss at 1.2700.
• Timeline: 1-2 days.

Bearish view

• Set a sell-stop at 1.2775 and a take-profit at 1.2700.
• Add a stop-loss at 1.2880.

(Click on image to enlarge)

The GBP/USD exchange rate retreated slightly on Tuesday after Jerome Powell hinted of his willingness to cut interest rates if inflation continues retreating. It dropped to 1.2800, down from this week’s high of 1.2830.

Federal Reserve rate cuts

The GBP/USD pair drifted downwards after Jay Powell, the Federal Reserve chair, testified in Congress. In his testimony, he welcomed the recent inflation numbers that showed that inflation was moderating.

The most recent consumer price index (CPI) data showed that the headline Consumer Price Index (CPI) cooled down to 3.2% in May. Another figure showed that the personal consumption expenditure (PCE) retreated to 2.6%.

In his statement, he said that more good inflation reports would boost the case for cutting rates. The next key inflation figure will come out on Thursday and analysts expect the number to show that prices pulled back again in June.

His statement suggested that the Fed will not cut interest rates in its next meeting in July. Nonetheless, if Thursday’s inflation number is encouraging, the Fed will likely point to a September interest rate cut.

A key external factor that could push the Fed stop to cut rates is the November election. If it cuts, the bank will likely be accused of political interference.

Meanwhile, the expectation is that the Bank of England will start to cut interest rates in its next meeting. The country has already completed its election and inflation has moved to its 2% target.

At the same time, the economy is showing signs of stagnation, which will make it one of the worst performers in the G7. As such, the cut is expected to supercharge the economic recovery.

The next key catalyst for the GBP/USD pair will be a statement by Huw Pill, the Chief Economist at the Bank of England. Jerome Powell will continue his testimony to congress on Wednesday.

GBP/USD technical analysis

The GBP/USD exchange rate has been in a slow uptrend after bottoming at 1.2300 in April. It rose to a high of 1.2830 this week, where it found substantial resistance. This was an important level since it was the neckline of the inverse head and shoulders pattern.

The pair has remained above the 50-day Exponential Moving Average and the 61.8% Fibonacci Retracement point. Also, the Average Directional Index (ADX), a popular trend indicator has pointed upwards.

Therefore, more upside will be confirmed if the pair rises above the key resistance point at 1.2827. If this happens, the next point to watch will be at 1.2900.

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