Pound struggles at resistance as BoE turns less hawkish

The central bank rate hikes are designed to cool an overheating economy that is struggling with rising inflation, rising prices, etc. Adding an extra 50bps or more to the cost of credit causes the repayments on your mortgage to go up, maybe the cost of goods too, which get passed on to consumers, and the end effect is demand destruction and the hope that businesses drop prices. As people save more. What we are seeing is rising and sustained higher prices for energy which is also pushing up the price of everything. The FOMC is going to push harder, so the US dollar is likely to get more support and that may come at the cost of the crosses like the pound’s strength. The euro is going to remain under pressure whilst the war in Ukraine continues which will add more US flows. The BoE will have to tread a thin line of market expectations and work out a way to support the pound.

Forex Analysis - GBPUSD

Since raising the UK bank interest rates three times over the last three meetings, the Bank of England has sounded more cautious than the FOMC. As inflation is expected to hit around 8% in April and could increase further later in the year, more rate hikes seem likely, including at the next policy update on 5 May (the day after the Fed). Although market pricing implies another 150 bps (to 2.25%), the BoE probably won't raise rates by that much. According to BoE Governor Bailey, there are signs that demand is slowing down. Governor Baily and Deputy Governor Cunliffe, who voted against a rate increase at the last meeting, speak at the "Stop Scams" conference today. It's unlikely they'll use this event to announce monetary policy, so I'm expecting the pound to move based on what happens with the euro and the dollar.

The ActivTrades sentiment indicator is my go-to contrarian view, and when we see traders shift towards being long or short ‘en masse’ I like to take the opposite view. Currently, the bullish side is gaining traction and after the close higher on 22nd March, I had also thought we could be seeing a change in trend.

The daily 20, 50, and 200-period EMAs are pointing to downside momentum and the 20 is acting as a decent daily dynamic resistance. A close above that moving average again would make me start to consider the possibilities of continued bullish strength, but until then I am happy to look for a continuation to the downside, to see if we can stop the ActivTraders out of their long positioning. 1.3000 is also a great target to the downside to trying again at a sweep of the lows.

The hourly chart shows that the intraday resistance came from the 200-period moving average and the low of the first hour during the London session. While that opening Initial Balance range holds, I am holding a short with a stop loss above the 1.31400 intraday swing highs.