GBP/USD Forecast: Sellers await a break below 1.2300

GBP/USD has stabilized above 1.2300 following the weak start to the week.
Sellers could remain on the sidelines as long as 1.2300 stays intact.
Fed policy announcements could trigger a big reaction in the pair later.

Eren Sengezer FXStreet

GBP/USD has gone into a consolidation phase slightly above 1.2300 early Wednesday after having closed the first two days of the week in negative territory. Although the near-term technical outlook points to a lack of buyer interest, the US Federal Reserve's (Fed) policy announcements later in the day should drive the pair's action.

The improving risk mood during the American trading hours on Tuesday made it difficult for the US Dollar to outperform its rivals and helped GBP/USD limit its losses. The US Bureau of Labor Statistics reported that the Employment Cost Index rose by 1% in the fourth quarter. This reading came in slightly lower than the market expectation of 1.1% and triggered a rebound in Wall Street's main indexes.

Later in the session, ADP Employment Change and the ISM Manufacturing PMI data will be featured in the US economic docket. Employment in the US private sector is forecast to rise by 170K in January. In case this data disappoints with a reading near 100K, the US Dollar could come under renewed bearish pressure. On the other hand, a print above 200K should help the US Dollar stay resilient against its rivals.

The Employment and the Prices Paid components of the ISM Manufacturing PMI will also be watched closely by market participants. A combination of lower input inflation and a contraction in manufacturing employment could translate into further US Dollar weakness.

Nevertheless, the impact of these data on the US Dollar should remain short-lived with investors refraining from taking large positions ahead of the Fed.

Markets widely expect the Fed to raise its policy rate by 25 basis points to the range of 4.5-4.75%. One more 25 bps hike in March is also nearly fully priced in, according to the CME Group FedWatch Tool. Hence, any hints regarding the rate outlook beyond March should trigger the next big action.

In case FOMC Chairman Jerome Powell leaves the door open to one more rate hike in May, this could be seen as a hawkish surprise and help the US Dollar gather strength. Powell is also likely to continue to push back against the 'Fed pivot' narrative but that shouldn't come as a surprise.

If Powell acknowledges that softer inflation should allow them to pause hikes in May and assess the situation, GBP/USD could gain traction. A gloomy growth outlook with a stronger chance of a recession should further weigh on the US Dollar.

GBP/USD Technical Analysis

GBP/USD needs to rise above 1.2370 (50-period Simple Moving Average (SMA) on the four-hour chart) and stabilize above that level in order to push higher toward 1.2400 (psychological level, static level) and 1.2430 (static level).

On the downside, a drop below 1.2300 (static level, psychological level, 100-period SMA) could attract sellers and force GBP/USD to extend its slide to 1.2270 (static level) and 1.2210 (Fibonacci 38.2% retracement of the latest uptrend).

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Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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