The GBP/USD pair reversed in favor of the U.S. dollar yesterday evening and declined by 220 points in less than a full day. Unsurprisingly, most of this decline occurred on Wednesday evening when the FOMC and Kevin Warsh announced the outcome of the June meeting. In short, the market did not expect the Fed to signal readiness for relatively aggressive monetary tightening. In my view, the situation could change as early as the July meeting if inflation in the United States begins to slow amid falling energy prices. However, if inflation remains near 4% (2 percentage points above the target level), the Fed will likely have to tighten policy, and it is unlikely that the regulator will stop after just one rate hike. The market considered such a possibility, but it was not prepared for the FOMC and Kevin Warsh to demonstrate such a strong commitment to bringing inflation back to target at any cost.
Be that as it may, the Bank of England and Federal Reserve meetings revived a market that had remained largely inactive until Wednesday evening. In my opinion, the market reacted only to the Fed meeting, as the Bank of England had not recently signaled a need for rate hikes and UK inflation had remained stable in recent months. Therefore, the market had little reason to expect hawkish rhetoric from Andrew Bailey and his colleagues. For this reason, I do not believe Thursday's decline in the pound was related to the Bank of England meeting. It is also worth noting that the market largely ignored geopolitical developments. The United States and Iran signed a memorandum of understanding, and many experts consider the agreement unfavorable for Washington. However, judging the success of Donald Trump's agreement is not my task. I am simply stating a fact: the end of the Middle East conflict did not force bears to retreat from the market.
The U.S. dollar performs better than the euro and the pound during periods of geopolitical uncertainty. Therefore, both the euro and the pound may still receive support from improving risk appetite. At the moment, the market remains cautious about the agreement between Iran and the United States and is waiting for the full reopening of the Strait of Hormuz, which is not an easy task in itself. Nevertheless, it can now be said that the war has officially ended, at least for the time being. The Fed triggered a strong rally in the U.S. dollar, but I do not yet see what could allow bears to continue extending their advantage. In my view, the broader trend remains bullish despite the pair's sharp declines this year.
The technical picture is currently as follows. All available and valid patterns have either been completed or invalidated. The only pattern I can identify is a bearish imbalance, which has not yet formed because today's daily candle has not closed. However, it is likely to appear with the opening of the next daily candle. As a result, a reaction to this new bearish pattern could provide traders with opportunities to open short positions. I would also note the proximity of the March 31 swing low, where liquidity could be taken. If that occurs, bulls may launch a counteroffensive based on the combination of factors. For now, however, the short-term technical picture remains bearish.
The economic news flow on Thursday attracted little market attention. As mentioned above, the market has spent the last two days reacting almost exclusively to the Fed meeting. The outcome of the Bank of England meeting cannot be described as negative for the pound, and the UK unemployment report released earlier in the day was fairly positive. In April, the unemployment rate declined from 5.0% to 4.9%, while traders had expected it to remain at 5.0%. However, this data, like much of the recent economic information, was largely ignored by the market.
The broader fundamental backdrop still suggests that, over the long term, I expect further weakness in the U.S. dollar. Even the conflict between Iran and the United States has not changed this view. Potential Fed rate hikes have not changed it either. Geopolitical tensions temporarily reminded the market of the dollar's safe-haven status, but the overall environment remains less favorable for the U.S. currency. The Fed intends to raise interest rates in 2026, which is supportive for the dollar. However, it should not be forgotten that tighter monetary policy will also slow the U.S. economy. I also believe that Fed tightening will be a temporary measure aimed at bringing inflation down more quickly, after which the central bank will likely return to an easing cycle. Therefore, in my opinion, any strengthening of the dollar is likely to be temporary.
News Calendar for the United States and the United Kingdom:
June 19: The economic calendar contains no significant events. Therefore, the impact of the economic backdrop on market sentiment on Friday is expected to be minimal.
GBP/USD Forecast and Trading Recommendations:
The long-term outlook for the pound remains bullish, while all bearish patterns have either been invalidated or are no longer relevant. Therefore, traders should wait for new patterns to emerge, as they will provide clearer signals regarding the next directional move. A bearish imbalance may form as early as tomorrow, which traders could use as a basis for considering new short positions. At the same time, the proximity of the 1.3158 low remains supportive for bulls, as it could become a liquidity target before a bullish reversal develops.
