GBP/USD Forecast: China Risks, Fed & BoE Decisions, GBP Reversal?

GBP/USD FUNDAMENTAL HIGHLIGHTS: China Risks, Fed & BoE Decisions GBPUSD Finds Short Term Support, EUR/GBP Stuck in a Range

China Risks, Fed & BoE Decisions

Apart from the rising uncertainty in China over Evergrande default risks, two central bank decisions will dominate industry theme next week. The Federal Reserve will provide their latest policy update regarding tapering of asset purchases, while attention may also centre round the dot plot projections, which may lean to the hawkish side. One other central bank in focus will be the Bank of England who can have two new members on the committee.

Since the last BoE meeting, the best comment have been created by Governor Bailey, who stated that members in August were split 4-4 regarding whether the minimum necessary criteria for raising rates have been reached. Following this comment, headline inflation has risen to 3.2%, hitting the best level since 2012, while the all important jobs market moved from strength to strength with all regions besides London, Scotland and the South East now above pre-pandemic levels. Of course, the BoE have now been cautious, given that the furlough scheme will expire by the end of the month, however, with accurate documentation level of vacancies, having hit over 1mln, the impact of the furlough scheme's expiration is probably be muted. Therefore, the BoE have reasons to be optimistic in regards to the economic recovery and while I believe risks are tilted for a hawkish outcome for the BoE meeting, there's a concern that markets may be overly optimistic amid the recent increase in rate hike calls by analysts as well as tightening priced in by money markets, where an interest rate rise to 0.25% is seen by May 22.

GBP/USD: Markets will be in sell the rally mode for Cable days gone by week whilst the pair struggled to produce a firm breach through 1.3880-1.3900. However, with GBP/USD back to 1.3750 the pair is back at near term support in the form of the 61.8% Fib of the year's range.

EUR/GBP: My favoured cross for trading the BoE would either be EUR/GBP or GBP/CHF given that GBP/USD could very easily be trapped with the Fed. On the broader time period, EUR/GBP still remains in a variety and you can find little signs of this changing. Nevertheless, key support resides at 0.8515-20 and 0.8500, therefore an in depth below the latter adhering to a hawkish BoE could see a go back to 0.8400.