GBP/USD rose strongly in March but could rise further to retest this year's highs near the 1.25 resistance this week as a fresh rise in oil prices keeps spot rates risking higher in the BoE (BoE) and more for the Fed. Its gains this week affected the resistance level 1.2423, which is stable near it at the time of writing the analysis.
Sterling entered the new month with a set of weekly gains on the dollar on Monday, but will likely have room to extend its March rebound further. Higher oil prices fuel UK inflation which was already moving in the wrong direction for the Bank of England.
Crude oil prices rose by a single-digit high after the Organization of the Petroleum Exporting Countries (OPEC) announced a significant cut to oil production levels planned for the weekend, potentially preserving the lingering risk of another bank rate hike for the next month.
Commenting on this, Neil Wilson, senior market analyst at Finalto Trading, said, “The precautionary measure will take 1.16 million barrels per day from the market. It appears that OPEC is feeling a bit panicked about demand this year and is trying to establish a psychological floor at $80.”
“It suggests that OPEC believes the Fed is heading for a hard landing — the banking crisis is the catalyst for this move and OPEC wants to go ahead with it,” he added.
The output cut is important for the pound because the Bank of England assumed in its latest forecast that inflation would halve this year and in fact rose from 10.1% to 10.4% in February, while Monday's oil price rally could hinder any forward pullback in inflation. Bank of England policymakers have also recently warned that if interest rates are raised further, this is likely to be only in response to signs of inflation becoming more stubborn or steadily at very high levels, which is exactly the danger posed by output cuts.
That is why sterling is now likely to pay more attention on Tuesday when BoE Chief Economist Howe Bell speaks on “Inflation, Resilience and Monetary Policy” at the International Center for Monetary and Banking Studies in Geneva.
Commenting on the performance, Sean Osborne, Chief Forex Analyst at Scotiabank, said that, “Despite the losses incurred by the pound overnight to the 1.2275 area, the pound is still in a strong short-term bullish trend. The broader technical signals remain positive and the fundamental trend signals are aligned positively for the GBP.”
“This means a limited downside for the pound at the present time, and continuous pressure to retest – at least – the main medium-term resistance at 1.2445/50,” he added.
Tuesday's speech on Wednesday follows an appearance from MPC Silvana Tenrio at the Royal Economic Society's annual conference, although highlights on the British calendar are booked with important US data that could have implications for the dollar. The Institute for Supply Management's PMI surveys of the US manufacturing and services sectors are set to provide some early insights into the performance of the US economy amid and after last month's series of small bank failures on Monday and Wednesday.
It follows Friday's March non-farm payrolls report, and the dollar could be particularly sensitive to any strong readings after US policymakers strongly suggested that turmoil last month in the banking sector could prevent interest rates from rising further in the US. The idea is that tougher lending standards will reduce the availability of credit in a "credit tightening" loop that stifles growth and curbs inflation without raising borrowing costs, bond yields and investor returns in the same way as other increases in the US interest rate.
GBP/USD Technical Outlook:
- Continued pressure on the dollar helped the bulls to gain more control over the performance of the GBP/USD currency pair.
- Stability is above resistance 1.2420, which will move the technical indicators towards overbought levels.
- I still prefer a selling strategy from every rising level of that resistance, and above it, if it continues.
The nearest targets for the current trend are 1.2470 and 1.2560, respectively. On the other hand, and for the same daily time period, breaking the support level at 1.2200 will be important for a new breach of the bullish trend.
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