GBP/USD Forecast: Sterling volatility set to explode in response to Fed fireworks

It is Saint Patrick's Day – but with closed pubs in both Ireland and the UK, traders have fewer distractions, allowing for a full focus on the Federal Reserve. For cable, it also means decision time after trading in a narrowing range so far in March.

The world's most powerful central bank is set to leave its policy unchanged but releases all-important growth, employment, inflation, and interest rate forecasts. Since the last such publication in December, America's vaccination campaign has picked up speed, with the US set to reach 50% of its population by mid-May. In addition, President Joe Biden signed his $1.9 trillion coronavirus relief bill into law and stimulus checks have already been deposited. 

On this backdrop, markets are penciling in the rise rate hike to come in late 2022 compared to only four out of 17 FOMC members foreseeing an increase during 2023. That is set to change now, and the question is by how much. 

Jerome Powell, Chairman of the Federal Reserve, will meet the press and will also try to walk a fine line between higher prospects for expansion to fears of inflation. One point he is likely to reiterate is that some 9.5 million Americans have yet to return to their pre-pandemic work.

See:

• US FOMC March Preview: The Fed walks the interest rate tightrope
• Federal Reserve Preview: The Good, the Bad and the Ugly edition, three critical things to watch

A balanced message would likely keep stock markets happy while bond yields continue rising, yet at a controlled pace, only nudging the dollar higher. How will sterling cope with a minor upward move of the greenback? The UK's vaccination campaign keeps supporting sterling while the Bank of England has ruled out setting negative rates. 

That means that if Powell keeps markets happy, sterling could stand out and rise – even if other currencies retreat against the greenback. 

GBP/USD Technical Analysis

Pound/dollar is trading just above the 50 and 200 Simple Moving Averages on the four-hour chart but below the 100 SMA. While momentum is to the downside, it is rising from the lows – all in all, the picture is balanced. 

Some resistance awaits at 1.3930, the daily high. It is followed by 1.3950, a cap from early this week, and then by the tough resistance line of 1.4010, 

Support awaits at 1.3850, which provided support last week, followed by 1.3810, the weekly low, and then by 1.3775, the monthly bottom. 

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