The GBP/USD exchange rate jumped to its 1.3630 this week, its highest level since February 2022 as the US dollar index (DXY) plunged. It ended the week at 1.3575 as focus shifts to the upcoming Federal Reserve and Bank of England (BoE) interest rate decisions.
Federal Reserve interest rate decision
The GBP/USD exchange rate has surged by 12% from its lowest level this year as the US dollar index crash accelerated.
The pair retreated slightly on Friday as investors focused on geopolitical risks following Israel’s attack on Iran, which risks a wider war in the region.
This conflict also risks stoking inflation as energy prices jump. Crude oil prices jumped sharply, with Brent and West Texas Intermediate (WTI) soaring above $70.
The next key catalyst for the GBP/USD pair will come out on Wednesday when the Federal Reserve delivers its interest rate decision. Economists expect the bank to leave interest rates unchanged and maintain a wait-and-see approach.
Data released this week showed that US inflation rose marginally in May, moving from 2.3% to 2.4%. Core inflation, which excludes the volatile food and energy products, remained unchanged at 2.8%.
These numbers meant that the impact of tariffs on the economy is still limited, likely because of forward purchases by companies. These purchases pushed the US trade deficit to a record high in March.
Analysts anticipate that the Federal Reserve will cut interest rates in September if the impact of tariffs on inflation remains muted.
UK inflation and Bank of England decision
The GBP/USD will also react to the upcoming UK consumer inflation data on Wednesday. Economists expect the data to show that the headline consumer inflation softened from 3.5% in April to 3.4% in May.
Core inflation, which excludes the volatile food and energy prices, is expected to move from 3.8% in April to 3.7% in April. The MoM inflation numbers are expected to drop to 0.3% and 0.4%, respectively.
Economists believe that the BoE will maintain a cautious tone in its interest rate decision as it continues to focus on inflation, which has remained above the 2% target level for a while.
The bank believes that cutting rates aggressively, as the European Central Bank (ECB) has done, will boost inflation. The challenge, however, is that higher interest rates are impacting its growth. Recent data showed that the UK GDP slumped by 0.3% in April, while the labor market weakened.
GBP/USD technical analysis
GBP/USD chart | Source: TradingView
The daily chart shows that the GBP/USD exchange rate peaked at 1.3600 this week and then pulled back slightly to 1.3575. It remains above the 50-day and 100-day Exponential Moving Averages (EMA), a sign that bulls are in control.
The pair has also formed a cup-and-handle pattern, a popular bullish sign in technical analysis. On the other hand, the pair has formed a rising wedge, a popular bearish sign.
The MACD and the Relative Strength Index (RSI) have formed a bearish divergence pattern. Therefore, the GBP/USD pair will likely have a bearish breakdown and move to 1.3400 and then bounce back.
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