Fed and BoE Divergence Strengthens GBP Against USD

The US dollar exhibited weakness on Friday following the Federal Open Market Committee (FOMC) policy meeting earlier in the week, which resulted in a surprising 50-basis point rate cut. Economists had anticipated a more modest 25-basis point reduction, and traders had priced in a 65% chance of a significant cut. This unexpected decision put considerable pressure on the dollar, leading to a decline against most major currencies.

In contrast, the Bank of England (BoE) decided to keep interest rates unchanged during its Thursday meeting, following a previous rate cut. This decision has provided a boost to the British pound (GBP), contributing to a bullish outlook for the GBP/USD currency pair. The divergence in monetary policy between the Fed and the BoE has created a favorable environment for the pound, particularly as the UK has seen a notable easing in inflation rates.

Recent data released on Thursday indicated a significant drop in US unemployment claims, suggesting that the labor market remains tight. This positive labor market data could enhance the likelihood of a soft landing for the US economy, despite concerns that the Fed's aggressive rate cut might signal potential economic troubles ahead.

On the technical front, the GBP/USD pair has reached a crucial resistance level at 1.3301. Although the current trend appears bullish, with the price making higher highs, there is a possibility of a retreat to retest the 30-day Simple Moving Average (SMA). The recent rally has pushed the price well above the SMA, and the Relative Strength Index (RSI) is nearing the overbought territory. However, a bearish divergence between the price and the RSI suggests that bullish momentum may weaken, potentially leading to a price drop. If the price remains above the SMA, the bullish trend is likely to continue.

As there are no significant economic reports scheduled for release from either the UK or the US today, the GBP/USD pair may consolidate after its recent gains. Traders should remain vigilant for any signs of a shift in momentum as the market digests the recent policy decisions from both central banks.