- The GBP/USD exchange rate helped lift the British pound to the top of the major currency charts last week.
- It may now rise further and possibly approach 1.27 if recent economic figures lead to a broad rain check by the US Federal Reserve.
- Expect an increase in interest rates on Wednesday.
- At the beginning of this week's trading, GBP/USD rose to the 1.2570 resistance level, before settling around 1.2500 at the time of writing the analysis, waiting for anything new.
All in all, the US dollar sold off heavily over the weekend, resulting in the British pound, New Zealand dollar, Swedish krona and the euro outperforming their other G10 counterparts even as they lag behind the Russian ruble, Indonesian rupiah and Brazilian real when measured on a G20 basis.
Friday's gains lifted GBP/USD away from technical resistance near the 1.25 round number after official figures showed the US Federal Reserve is making potentially underestimated progress in its battle with inflation. Commenting on this, Paul Sianna, chief technical analyst at BofA Global Research, says, “There is a risk for sterling / dollar positions in the event that the dollar fails to turn back due to the concerns of regional banks that turn the Fed’s views on the market into cautious and thus weaken the dollar.”
Economic Outlook
The inflation rate in the core personal consumption expenditures (PCE) price index — the Fed's target measure — fell from 4.7% to 4.6% when data for March was released on Friday, while the details of the report suggest the bank may have leveled up and advanced. Furthermore. That's because the monthly pace of service inflation halved to just 0.2% and its weakest since before the big downturn that started in 2021 if the July 2022 result is put to one side, also a pace of increase that's not inconsistent with the Fed already closing in on its 2 target %.
Fed policymakers have repeatedly stated that service inflation will be watched more closely than other types of price pressures, but the recent declines may be more important to the bank this week if they are considered in conjunction with the sharp slowdown in GDP growth that has been reported.
For his part, Jarrod, chief economist at Kiwibank, says, “The US Federal Reserve raised the money rate by 475 basis points from 0.25% to 5%, and it is likely to rise again this week to 5.25% (same as the Reserve Bank of New Zealand). The Fed's policy path after May is open to debate. "The recent turmoil in the banking sector is a major risk factor," he added.
Growth in the United States slowed to 1.1% annually in the first quarter. Down from 2.1% previously, while the Federal Reserve's previous large increases in US interest rates meanwhile continued to put significant pressure on the US banking sector. Both slowing growth and tightening lending standards linked to weaknesses in the banking sector have been cited by policy makers as likely to help bring inflation back on target, hence there may now be an underappreciated risk about leaving interest rates unchanged this week.
Sterling forecast against the dollar today:
The hawkish FOMC and USD could push GBP/USD down towards 1.2249 (50-day moving average). Last month's forecasts already indicated that there was one or two more hikes likely to come this year anyway, but with economists and banking markets settling on another for this week, the dollar could fall and the pound's rally could be extended further if the Fed takes the plunge.
Currently, the stability of the price of the GBP/USD pair near the resistance 1.2550 ensures the continuation of the bullish trend. From above, we prefer to sell the currency pair.
On the other hand, according to the performance on the daily chart below, the move towards the support level 1.2380 is important for the strong and continuous control of the bears on the trend.
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