GBP/USD Forecast: Pound Sterling could retreat to 1.2200

GBP/USD has lost its bullish momentum and retreated to the 1.2250 area early Friday after having closed below 1.2300 on Thursday. The technical picture suggests that the pair could extend its correction in the short term. Moreover, the negative shift witnessed in risk sentiment is likely to help the US Dollar keep its footing ahead of the weekend.

The Bank of England (BOE) announced on Thursday that it raised its key rate by 25 basis points to 4.25% as expected. Only two members of the MPC voted in favor of keeping the rate unchanged at 4%. In the policy statement, "If there were to be evidence of more persistent pressures, then further tightening of monetary policy would be required," the BOE reiterated.

Following the BOE's policy announcements, Governor Andrew Bailey noted that they were expecting inflation to fall quite rapidly before summer. However, "If all prices try to beat inflation we will get higher inflation," Bailey told BBC and noted that they will need to hike the policy rate again if prices continued to increase.

According to Reuters, future markets are currently pricing in a 38% probability of another 25 bps rate hike in May.

Earlier in the day, the data published by the UK's Office for National Statistics showed that Retail Sales rose by 1.2% in February. This reading surpassed the market expectation for an increase of 0.2% but failed to trigger a noticeable market reaction.

S&P Global PMI will release preliminary March PMI surveys for the UK and the US on Friday. In case the publication shows an increase in wage inflation in the UK, markets could lean toward one more BOE hike and help Pound Sterling hold its ground.

Similarly, the US Dollar should manage to gather strength against its rivals if the PMI surveys reveal healthy economic activity in the private sector alongside strong wage pressures.

Investors will also keep a close eye on risk perception. The UK's FTSE 100 Index opened 1% lower and caused GBP/USD to stretch lower. US stock index futures trade mixed but a negative opening in Wall Street could weigh on the pair ahead of the weekend and vice versa.

GBP/USD Technical Analysis

GBP/USD broke below the ascending regression channel and the 20-period Simple Moving Average (SMA) on the four-hour chart. Additionally, the Relative Strength Index (RSI) indicator retreated below 50, confirming the bearish tilt in the short-term technical outlook.

On the downside, 1.2200 (50-period SMA, psychological level, static level) aligns as next support. A four-hour close below that level could bring in additional sellers and cause the pair to stretch lower toward 1.2170 (static level) and 1.2130 (static level).

In case the pair manages to return within the ascending channel by stabilizing above 1.2270/80 area, it is likely to face next resistances at 1.2300 (psychological level, static level) and 1.2345 (Thursday high).