Forex Market: GBP/USD steady near 20-week highs as the Federal Reserve is expected to take a dovish policy stance

GBP/USD kept steady near yesterday’s 20-week high in early European trade on Wednesday, as the US Dollar remained close to two-year lows against major peers ahead of the outcome of the Federal Reserve’s policy meeting later today.

The central bank is expected to stick to a dovish policy stance amid alarming spikes in new COVID-19 infections across several states, as market perception of the US economy’s relative outperformance has begun to fade. Yesterday a gauge of US consumer confidence was reported to have dropped more than anticipated in July after two straight months of recovery, while indicating accelerating pandemic is weighing on consumption.

Market players will be looking for any clues that the Fed will boost its purchases of longer-term debt, implement yield caps or target higher inflation than previously indicated.

According to Goldman Sachs, a possible shift by the US central bank “towards an inflationary bias” coupled with a record high debt by the US government are factors that raise “real concerns around the longevity of the U.S. dollar as a reserve currency.”

As of 7:05 GMT on Wednesday GBP/USD was edging up 0.12% to trade at 1.2947, while moving within a daily range of 1.2912-1.2948. Yesterday it climbed as high as 1.2953, or its strongest level since March 11th (1.2977). The major pair has risen 1.04% so far this week and looked set for its second straight month of gains and the best monthly performance since October 2019.

On today’s economic calendar, at 8:30 GMT Bank of England will release its monthly report on mortgage approvals for June. The median estimate by experts points to an increase to 33,900 approved mortgages from 9,273 mortgages in May. The latter has been the lowest number of mortgages approved for house purchase since comparable series began in 1993.

At 14:00 GMT the National Association of Realtors will report on US pending home sales. Contracts to buy previously owned homes in the country probably increased 15.0% in June compared to May, according to estimates. In May, pending home sales soared 44.3%, or at the sharpest monthly rate on record.

At 18:00 GMT the Federal Reserve is scheduled to announce its decision on monetary policy. The Federal Open Market Committee (FOMC) will probably keep the target range for the federal funds rate intact between 0% and 0.25% at its two-day policy meeting, scheduled to be concluded today, according to market expectations.

On July 17th the central bank expanded its Main Street Lending Program to ensure better access to credit for non-profit organizations (educational institutions, hospitals, social service organizations), which were in sound financial state before the pandemic.

The Minutes from the Fed’s June meeting showed policy makers remained committed to use the entire range of tools in support of the economy, while the central bank should strengthen the guidance it provides to global markets.

The policy decision will be followed by a press conference with Fed Chair Jerome Powell at 18:30 GMT.

Bond Yield Spread

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled 24.4 basis points (0.244%) as of 6:15 GMT on Wednesday, up from 24.1 basis points on July 28th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.2908
R1 – 1.2977
R2 – 1.3022
R3 – 1.3091
R4 – 1.3160

S1 – 1.2862
S2 – 1.2793
S3 – 1.2748
S4 – 1.2703

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