GBPUSD has gained strength and surged towards 1.2300 early Wednesday reaching its highest level since early February. The pair’s near-term technical outlook indicates a bullish bias. But the reaction of the US Dollar to the Federal Reserve’s (Fed) policy pronouncements should affect the action in the American session.
Markets are virtually completely pricing in a 25-basis point rate rise by the Bank of England on Thursday.
Earlier in the day, the UK’s Office for National Statistics announced that inflation in the UK. As measured by the Consumer Price Index (CPI), increased to 10.4% year on year in February, up from 10.1% in January. This number outperformed the market’s forecast of 9.8% by a wide margin. The Core CPI, which excludes volatile food and energy costs, increased to 6.2% from 5.8% in the same period.
Given high inflation rates, the likelihood of the probability of a 25-basis point (bps) rate hike by the Bank of England (BOE) on Thursday increased from 50% on Tuesday to 90% on Thursday, showing the hawkish tilt in forecasts.
The Fed is largely expected to boost its policy rate.
Later in the day, the Fed is expected to boost its policy rate by 25 basis points to 4.75%-5%. This decision has already been made, and it is unlikely to cause a big reaction.
Instead, investors will focus on the terminal rate estimate in the updated Summary of Economic Projections (SEP). Often known as the dot plot. In December, the median forecast for the policy rate for the end of 2023 was 5.1%. If the upward revision is minor, with the key rate’s upper ceiling falling anywhere between 5.25%. And 5.5%, risk flows may dominate markets. GBPUSD will benefit from an extra boost. If the dot plot indicates that some officials have penciled in rate decreases. Before the end of 2023, the market should respond similarly.
If the SEP demonstrates that none of the officials projected a rate decrease in 2023, US Treasury bond yields are likely to gain traction and assist the US Dollar gain strength.
Further The statements of Fed Chairman Jerome Powell may potentially have an impact on the value of the US dollar. If Powell reassures markets that liquidity difficulties in the banking system are under control and that the Fed will continue to tighten policy to prevent inflation, safe-haven flows may return to markets, forcing the GBPUSD to fall.
GBPUSD Technical Analysis
The initial barrier for GBPUSD is at 1.2300, which is the midpoint of the ascending regression channel that began in early March. Over that level, 1.2330 (previous support, static resistance from January) might be considered as the next barrier before the pair reaches the rising channel’s upper limit at 1.2370.
On the downside, important support is aligned around 1.2230 (lower limit of the channel, 20-period Simple Moving Average (SMA).
Further losses approaching 1.2200 and 1.2160 might be seen with a four-hour closing below that level.
