Sterling drops after US bank rescue assures Fed’s rate hike

Fed will almost definitely raise interest rates on Wednesday as the value of the pound against the US dollar falls as a result of the US bank rescue. Bearish two-bar reversal pattern suggests short-term downside pressure for GBP/USD which is trading at 1.2460 at the time of typing.

Tuesday’s European session saw the Pound Sterling falling into the 1.24s against the US dollar as the dollar gains support following the weekend announcement of First Republic Bank’s emergency bailout. This calms markets and suggests the Federal Reserve is much more likely to hike rates at its meeting concluding Wednesday.

The GBP/USD pair is retracing from new year-to-date highs in the 1.2580s achieved on April 28 and forming a two-bar reversal pattern, which suggests further declines in the near term even though the overall trend is still bullish.

The announcement that JP Morgan has stepped in to help distressed US regional lender First Republic Bank (FRB) after concerns that it may be taken over by the Federal Deposit Insurance Corporation (FDIC) over the weekend supports the US dollar.

After last week’s data revealed prices in the US are still stable, the high-than-expected PCE inflation data, the Federal Reserve’s preferred inflation gauge, continue to support the US dollar.

At the upcoming FOMC meeting on May 3, expectations have solidified for a 25-basis point (bps) rate hike by the Federal Reserve (Fed). According to Feds Funds Futures data, the likelihood of a quarter-percent rate hike has increased from 85% last week to 97% as of this writing.

According to data for March, UK inflation remained above 10% for a seventh straight month, indicating that the BoE)is far from finished raising interest rates. The US Fed, in contrast, is thought to be reaching the conclusion of its cycle of rate hikes. Because it will draw in more capital, the prospect of relatively higher UK interest rates benefits the pound sterling over the dollar.

GBP gains underpinning support from an unexpected MoM rise in UK house prices by 0.5% in April versus the negative figure expected, according to data from the UK’s biggest mortgage lender, Nationwide.


Data from the Commodity Futures Trading Commision (CFTC) shows speculative investor flows have become increasingly supportive of the Pound over recent weeks, with non-commercial traders increasing their long bets above those of commercial traders who have been increasing short bets.

JOLTS jobs reports data for March, scheduled for release at 14:00 GMT, could impact on the pair. After the release of last month’s JOLTS, for example, the US Dollar declined in as job openings fell from 10.4M to 9.9M.

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

A pullback may be unfolding at the moment after a two-bar bearish reversal pattern formed at the recent highs. Two-bar reversals are fairly reliable patterns which occur when a long green full-bodied candle that makes new highs as formed on April 28 is immediately reversed the following day by a long red-down candle of a similar length. They are bearish short-term signals.