Pound Sterling vs US Dollar recovers to trade back above 1.2500 ahead of the key Federal Reserve policy meeting.

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• Pound Sterling vs US Dollar recovers to trade back above 1.2500 ahead of the key Federal Reserve policy meeting.
• A dovish hike could see further gains for GBP/USD and a re-test of the 2023 highs at 1.2583.
• The technical picture remains overall bullish as price consolidates within a longer-term uptrend.

The Pound Sterling (GBP) temporarily bounces back above the 1.2500 handle against the US Dollar (USD) during the European session on Wednesday. The main event risk on the horizon for GBP/USD is the Federal Reserve (Fed) monetary policy meeting, with the Federal Open Market Committee (FOMC) deciding the Fed Funds Rate. The FOMC meeting is set to conclude at 18:00 GMT and is likely to inject some volatility into US Dollar pairs.

From a technical perspective, GBP/USD continues to trade in a range within a broader bullish trend which began ever since the printing of the September lows. Longs are, therefore, favored over shorts.

GBP/USD has been in an extended sideways range within a broader uptrend that began at the September 2022 lows. Despite the volatile ups and downs of recent months, the pair did manage to make new highs in the upper 1.25s in late April and the overall trend remains marginally bullish. Thus, Pound Sterling longs are favored over shorts.

GBP/USD: Daily Chart

A two-bar bearish reversal pattern formed at the recent highs on April 28 and May 1. Two-bar reversals are fairly reliable patterns which occur when a long green full-bodied candle that makes new highs is immediately followed by a long red-down candle of a similar length – as happened on Friday, April 28 and Monday, May 1.

The pattern was followed by a bearish day on Tuesday, May 2 and dependent on other factors such as the outcome of the FOMC meeting, could signal further downside. Two-bar reversals, however, are only very short-term bearish signals.

If more downside follows, it could see GBP/USD retest the 1.2350 April-range lows.

Given the dominant trend remains bullish-to-sideways, however, pressure to the upside is likely to re-emerge eventually, and could see the price recover and rally before breaking to fresh highs. This may even happen sooner than expected depending on Wednesday’s Federal Reserve meeting outcome.

If Pound Sterling bulls take over again, a decisive break above the year-to-date 1.2583 highs of April 28, would probably lead to a continuation higher to the next key resistance level at circa 1.2680.

Decisive breaks are usually characterized by moves that begin with a strong green daily bar that breaks above the ceiling level or key high, with price closing near the highs of the day. Alternatively, three consecutive green bars above the ceiling level can also confirm breakouts. Such insignia provide confirmation that the break is not a ‘false break’ or bull trap.

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