GBP/USD Forecast: Bulls looking to seize back control on hawkish BoE

• A combination of factors prompted aggressive short-covering around GBP/USD on Thursday.
• The risk-on mood weighed on the safe-haven USD; a more hawkish BoE boosted the sterling.
• Surging US bond yields helped revive the USD demand and capped the upside for the major.

The GBP/USD pair witnessed an aggressive short-covering move on Thursday and rallied around 140 pips from the vicinity of the 1.3600 mark, or monthly lows. The US dollar weakened across the board and reversed the previous day's post-FOMC gains to the highest level since August 20. The Fed indicated that it will likely begin reducing its monthly bond purchases toward the end of this year. This, however, disappointed some investors expecting an immediate start to the withdrawal of the massive pandemic-era stimulus and prompted fresh selling around the greenback.

Apart from this, the prevalent risk-on environment – as depicted by a strong bullish move in the equity markets – further exerted pressure on the safe-haven greenback. The global risk sentiment improved further after the People’s Bank of China injected more money into the banking system, easing concerns about contagion from a potential China Evergrande default. This comes a day after the ground said it would make interest payments on an onshore bond. However, it was not clear whether the debt-ridden developer made coupon payments on dollar bonds due on Thursday.

Meanwhile, the British pound got an additional boost after the Bank of England (BoE) announced its policy decision. As was expected, the UK central bank left the benchmark interest rate unchanged at 0.10% and the Asset Purchase Facility steady at £895 billion at the end of the September meeting. The hawkish tilt came from the vote distribution, wherein Deputy Governor Dave Ramsden and external MPC member Michael Saunders favoured lowering the amount of asset purchase to £840 billion. The BoE also indicated that a modest tightening over the forecast period was likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term.

Adding to this, policymakers warned that inflation could rise above +4% by year-end and forced investors to start pricing in the prospects for an early interest rate hike. The markets now see an initial 15 bps hike in March 2022 as against May previously and see the benchmark BoE rate at 0.5% in September 2022, earlier than November 2022 before the announcement. This was reinforced by a sharp spike in the two-year British government bond yield, which rose the most since March 2020. The pair jumped to fresh weekly tops, though struggled to capitalize on the move beyond mid-1.3700s.

The USD found some support from surging US Treasury bond yields, which, in turn, was seen as a key factor that kept a lid on any further gains for the major. In fact, the yield on the benchmark 10-year US government bond shot back above the 1.4% threshold for the first time since July and helped revive demand for the greenback. The pair now seems to have entered a bullish consolidation phase and was seen oscillating in a range above the 1.3700 mark through the Asian session on Friday. Market participants now look forward to a scheduled speech by external BoE MPC Member Silvana Tenreyro for a fresh impetus. The Fed Chair Jerome Powell is also scheduled to speak at an online event later during the early North American session. This should further allow traders to grab some meaningful opportunities on the last day of the week.

Short-term technical outlook

From a technical perspective, bulls might now wait for some follow-through buying beyond the overnight swing highs, around mid-1.3700s, before positioning for any further appreciating move. The pair might then aim to surpass an intermediate resistance near the 1.3770-80 region and reclaim the 1.3800 mark. The next relevant hurdle is pegged near the 1.3840-50 supply zone, above which the pair seem set to climb back towards the 1.3900 mark en-route monthly tops, around the 1.3910-15 region touched last week.

On the flip side, any meaningful fall below the 1.3600 mark now seems to find decent support near the 1.3665-60 region. A convincing break below will negate any near-term positive bias and turn the pair vulnerable to challenge the 1.3600 mark. This is closely followed by July monthly swing lows, around the 1.3570 region, which if broken decisively should pave the way for a slide towards the key 1.3500 psychological mark.