GBP/USD finds an intermediate cushion around 1.2330, Fed-BoE policy divergence to trim ahead

• GBP/USD has gauged an intermediate cushion around 1.2330, still, further downside is on cards.
• Federal Reserve is expected to announce a smaller interest rate hike by 25 bps to the 4.50-4.75% range.
• A continuation of a bumper interest rate hike is expected from the Bank of England to contain stubborn inflation.
• GBP/USD is testing the strength of the downside break of the Descending Triangle.

GBP/USD has gauged intermediate support around 1.2330 after a vertical decline move in the early European session. The further downside in the Cable is still favored as the risk-off impulse is strengthening vigorously. Investors are dumping the risk-perceived assets amid rising volatility ahead of the interest rate decision by the Federal Reserve (Fed), scheduled for Wednesday. Also, the Bank of England (BoE) is going to announce its first monetary policy on Thursday.

United States equities are facing immense as investors are expecting that further interest rate hike by the Federal Reserve will escalate recession fears. S&P500 futures have turned negative after surrendering morning gains in no time. Also, the 500-stock basket futures ended Monday’s trading session on a weaker note, which indicates sheer pessimism among the market participants. Contrary to the USD Index, the alpha on US government bonds is displaying a subdued performance. The 10-year US Treasury yields are hovering around 3.54%.

Federal Reserve to decelerate policy tightening pace further

Economic indicators that provide nuggets about the state of United States inflation have conveyed an expression of deceleration in the Consumer Price Index (CPI). A contraction in consumer spending and lower prices fixed by producers at their factory gates in the month of December are indicating that the inflationary pressures are no more extremely stubborn now and are in a declining trend.

Therefore, the think tanks have started considering a further slowdown in the pace of policy tightening by the Federal Reserve (Fed).

Analysts at Rabobank point out that it has become increasingly likely that the Federal Reserve will slow down its hiking cycle to 25 bps. For interest-rate guidance “We continue to think that based on the fading momentum of inflation, the Federal Open Market Committee (FOMC) is likely to stop at a 4.75-5.00% target range and pause for the remainder of the year.”

It is worth mentioning that after hiking interest rates by 75 basis points (bps), straight for four times, Fed chair Jerome Powell trimmed the scale of the interest rate hike to 50 bps in its December monetary policy meeting. And now, is considering a further decline in the scale of the interest rate hike to 25 bps.

United States Employment data hogs limelight

Wednesday’s trading session is going to be a power-pack one amid the release of the United States Automatic Data Processing (ADP) Employment data and ISM Manufacturing PMI apart from the Federal Reserve policy. According to the estimates, the economic data is seen at 170K, lower than the former release of 235K.

The US labor market remained extremely tight in CY2022 but the continuation of interest rate hikes by Federal Reserve chair Jerome Powell is denting the expression of optimism in producers. Firms are aiming to optimally use their current labor force to handle operations and have paused the recruitment process due to the dismal economic outlook.

Meanwhile, an absence of expansion plans from various firms to avoid higher interest obligations has resulted in lower demand for fresh talent.

The US ISM Manufacturing PMI data is expected to contract to 48.0 from the former release of 48.4. As firms are operating with less capacity to avoid higher inventory due to lower demand, a contraction in manufacturing activities won’t be a surprise for the market participants. However, this might accelerate United States' recession fears.

Bank of England is keen to contain its double-digit inflation figure

Despite being the early adopter of hawkish monetary policy, the Bank of England has failed in achieving a decent decline in the inflation rate. The United Kingdom economy is operating with a double-digit inflation rate despite pushing interest rates to 3.50%. Rising food prices and labor costs have been a major hurdle for Bank of England Governor Andrew Bailey in achieving price stability. According to a poll from Reuters, Investors are mostly betting on another half percentage-point increase to 4.0% and that Bank Rate will peak at 4.5% soon.

A fresh rate hike cycle by the central banks is going to trim the Federal Reserve-Bank of England policy divergence.

GBP/USD technical outlook

GBP/USD is aiming to shift its auction profile below the horizontal support of the Descending Triangle chart pattern plotted from January 26 low at 1.2344 on an hourly scale. The downward-sloping trendline of the aforementioned chart pattern is placed from January 26 high at 1.2430. On Monday, the Cable attempted to deliver a breakout of Descending Triangle, however, the lack of follow-up buying failed to maintain momentum in the Pound Sterling.

The asset has slipped below the 50-and 200-period Exponential Moving Averages (EMAs) at 1.2372 and 1.2348, which indicates more weakness ahead.

Also, the Relative Strength Index (RSI) (14) has slipped into the 20.00-40.00 range, which has triggered the downside momentum.