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GBP/USD is testing critical hourly support

  • GBP/USD is attempting to break back to the downside. 
  • There is a lot going into the mix and geopolitics are front and centre. 

GBP/USD is holding tight in somewhat bearish territory below 1.35 the figure. At 1.3480, the price is tinkering on the edge of another run to the downside having already fallen from 1.3490 to print a low of 1.3473.

Sterling dropped on Monday to its lowest in three weeks versus the US dollar, with traders moving out of risk and into safe havens due to the expectations of Fed tightening and escalating tensions between Russia and Ukraine.

The market is getting set for a US Federal Reserve meeting this week and the chances are, the central bank is about to signal the removal of its vast stimulus programme.

''A likely March rate hike has been well communicated, so a "prepare for liftoff" signal will not be market-moving,'' analysts at TD Securities explained. ''More important will be guidance on QT as well as the funds rate after March. We don’t expect definitive signals, unfortunately; the next dot plot update is in March. The result could be mixed messages.''

Meanwhile, the spotlight has been on geopolitics. The United States and Uk set the stage for the risk of start to the week on Sunday. The US said it was ordering diplomats' family members to leave Ukraine, in one of the clearest signs yet that Washington is bracing for an aggressive Russian move in the region. The UK has repeatedly been warning Russia that an invasion would be "disastrous" and a "painful, violent and bloody business", as PM Boris Johnson warned. 

Stock markets plummeted in a broad-based sell-off on Monday, and the S&P 500 came within a hair's breadth of a correction, its first correction since the 2020 collapse in global markets brought on by the coronavirus pandemic. 

The S&P 500 slumped as much as 4%. However, US stocks ended higher Monday after reversing heavy early losses rallying late ahead of mega-cap technology earnings and a Federal Reserve policy meeting this week. The Nasdaq Composite gained 0.6% to 13,855.13, turning green in a drastic last-minute reversal. The S&P 500 rose 0.3% to 4,410.13 and the Dow Jones Industrial Average was also 0.3% higher, to 34,364.50.

GBP domestic fundamentals and politics

Meanwhile, British business activity grew less than anticipated in January, with the Purchasing Managers Index (PMI) touching an 11-month low, but cost pressures stayed high. This is data that will be eyed in anticipation of the Bank of England that is expected to hike rates in February. Last week, UK inflation rose faster than expected to its highest in nearly 30 years in December.

Besides economics, in the background, the investigation into Parttgate at the official residence of British Prime Minister Boris Johnson during Britain's 2020 lockdown is due to be published this week. MPs may force a confidence vote on BoJo after the release of the Sue Gray report which is likely to put the brakes on any significant correction in the pound. 

GBP/USD technical analysis

From a technical perspective, however, the bears will need to penetrate below the current lows and hourly support if the downside is going to be sustained:

 

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