GBP/USD Forecast: Pound Sterling needs to hold above 1.2500 to keep bulls interested

GBP/USD has gathered recovery momentum and climbed above 1.2500 early Wednesday after having closed the first two days of the week in negative territory. 1.2500 aligns as a key level for the pair but investors could ignore technical developments while assessing the impact of the Federal Reserve's (Fed) policy announcements on the US Dollar's (USD) valuation and risk sentiment.

Although the USD came under renewed selling pressure during the American trading hours on Tuesday, the risk-averse market atmosphere didn't allow GBP/USD to gain traction.

Reviving fears over a deepening banking crisis in the US following the collapse of First Republic Bank earlier in the week forced investors to seek refuge and triggered a sharp decline in the US Treasury bond yields on Tuesday.

Later in the day, the Fed is expected to raise its policy rate by 25 basis points (bps) to the range of 5-5.25%. Markets forecast a pause in tightening cycle after this rate hike with the CME Group FedWatch Tool showing virtually 0% probability for one more rate increase in June.

How resurfacing banking woes will impact the Fed's policy outlook will be the key to the USD's performance. In case the Fed downplays contagion concerns and argue that the banking crisis will be contained, the initial reaction could help the USD gather strength. However, such a stance could also cause US yield to push further lower. In that scenario, the USD's upside is likely to remain limited. Nevertheless, risk aversion should make it difficult for GBP/USD to stretch higher.

On the other hand, the USD could come under renewed selling pressure if the Fed confirms the pause in tightening cycle and opens the door for a possible rate cut later in the year to address tightening in financial conditions. The US central bank is under increasingly political pressure as well with Democratic lawmakers reportedly urging it to stop raising interest rates. 

To conclude, GBP/USD's volatility is likely to ramp up during the FOMC Chairman Jerome Powell's press conference, making it risky to trade. It might not be easy for the pair to find direction with investors scrutinizing every comment and what it would mean for the policy moving forward.

GBP/USD Technical Analysis

GBP/USD climbed back within the ascending regression channel by rising above 1.2500 early Wednesday. The Relative Strength Index (RSI) indicator on the four-hour chart also recovered above 50, pointing to a bullish tilt in the near term.

On the upside, 1.2550 (static level) aligns as first resistance before 1.2570 (end-point of the latest uptrend, mid-point of the regression channel and 1.2600 (psychological level, static level).

In case GBP/USD falls below 1.2500 and confirms that level as resistance, it is likely to face interim support at 1.2450 (100-period Simple Moving Average (SMA)) before extending its slide toward 1.2400 (200-period SMA; Fibonacci 23.6% retracement).