GBP/USD erases losses toward mid-1.34s on mixed reaction to Yellen's remarks

The GBP/USD pair plummeted to a fresh 11-day low at 1.3410 as the US Dollar Index spiked to its highest level in more than three weeks at 93.10 with the initial reaction to Fed Chairwoman Yellen's speech. However, the pair started to retrace its losses as the greenback lost its bullish momentum and was last seen trading at 1.3460, only a few pips below its opening level.

Addressing the FOMC's struggle to forecast inflation, Yellen argued that despite many uncertainties around how inflation was behaving, it would be imprudent to keep monetary policy on hold until inflation is back to 2%. Yellen further noted that the Fed needed to continue gradual rate hikes in light of subdued inflation. Commenting on Yellen's speech, “the gradual approach means that, even if they are wrong on inflation it won’t be a big mistake. That’s the message they are trying to convey,” Kevin Logan, chief U.S. economist at HSBC Securities, in New York, told Reuters.

• Where now for Federal Reserve policy? - ING

Following the knee-jerk upsurge, the DXY struggled to remain above the 93 handle as Yellen's message was not hawkish enough to affirm another rate hike in December. In fact, the CME Group FedWatch Tool's rate hike probability eased to 76.4% after leaping up to 81.4% during the first few minutes of her speech. As of writing, the US Dollar Index was at 91.80, still gaining 0.4% on the day.

The economic calendar on Tuesday won't be featuring any significant data from the UK and investors will be focusing on St. Louis Fed President James Bullard's and Fed Governor Lael Brainard's speeches later in the NA session. 

Technical outlook

The RSI indicator on the H4 chart for the pair is now rising towards the 50 handle, suggesting that the bears getting exhausted. The pair could face the initial hurdle at 1.3500 (psychological level) ahead of 1.3570 (Sep. 25 high) and 1.3630 (Sep. 20 high). On the downside, supports are located at 1.3410/00 (daily low/psychological level), 1.3330 (20-DMA) and 1.3180 (Sep. 14 low). 

• GBP/USD neutral/bearish near term – Scotiabank