GBP/USD continues to trade marginally lower on the day below 1.2300 early Friday. The data from the UK showed that Retail Sales rose by 1.2% in February, compared to the market expectation of 0.2%, but failed to provide a boost to the Pound Sterling ahead of PMI data.
GBP/USD faces first resistance at 1.2300, where the mid-point of the ascending regression channel coming from early March is located. Above that hurdle, 1.2330 (former support, static resistance from January) could be seen as the next resistance before the pair targets the upper limit of the ascending channel at 1.2370.
On the downside, 1.2230 (lower limit of the ascending channel, 20-period Simple Moving Average (SMA)) aligns as key support. With a four-hour close below that level, additional losses toward 1.2200 (psychological level) and 1.2160 (50-period SMA) could be witnessed.
GBP/USD has gathered bullish momentum and advanced toward 1.2300 early Wednesday, touching its highest level since early February. The pair’s near-term technical outlook points to a bullish bias but the US Dollar’s reaction to the US Federal Reserve’s (Fed) policy announcements should influence the action in the American session.
The UK’s Office for National Statistics reported earlier in the day that inflation in the UK, as measured by the Consumer Price Index (CPI), climbed to 10.4% on a yearly basis in February from 10.1% in January. This reading surpassed the market expectation of 9.8% by a considerable margin. The Core CPI, which excludes volatile food and energy prices, rose to 6.2% in the same period from 5.8%.
Following hot inflation figures, the probability of a 25 basis points (bps) Bank of England (BOE) rate hike on Thursday surged above 90% from 50% on Tuesday, reflecting the hawkish tilt in the expectations.
Later in the day, the Fed is forecast to raise its policy rate by 25 bps to the range of 4.75%-5%. This decision is already baked in and it’s unlikely to trigger a significant reaction.
Instead, investors will pay close attention to the terminal rate forecast in the revised Summary of Economic Projections (SEP), the so-called dot plot. In December, the median view of the policy rate at end-2023 stood at 5.1%. If the upward revision is not significant with the upper limit of the key rate landing somewhere between 5.25% and 5.5%, risk flows could dominate markets and provide an additional boost to GBP/USD. If the dot plot reveals that some policymakers penciled down rate cuts before the end of 2023, that should also trigger a similar market reaction.
On the other hand, US Treasury bond yields are likely to gain traction and help the US Dollar gather strength if the SEP shows that none of the policymakers expected a rate cut in 2023.
FOMC Chairman Jerome Powell’s comments could also influence the US Dollar’s valuation. If Powell reassures markets that liquidity issues in the banking sector are contained and that they will continue to tighten the policy to tame inflation, safe-haven flows could return to markets and force GBP/USD to turn south.