GBP/USD Weekly Forecast: Fed, BoE and banking crisis to dictate the next direction

• GBP/USD bulls survived even as US banking crisis reached European shores.
• Focus shifts to US Federal Reserve and Bank of England policy announcements.
• GBP/USD buyers stay hopeful whilst above 1.2000 amid bullish daily RSI.

The Pound Sterling regained the upper hand against the United States Dollar (USD), despite the global banking sector tensions. The GBP/USD pair added more than 100 pips over the week, having found strong support at the 1.2000 psychological level. The further upside in Cable hinges on the policy announcements from the Bank of England (BoE) and the US Federal Reserve (Fed) due in the week ahead.

GBP/USD: What happened last week?

Markets had almost written off the US Dollar in the early part of the week after the US banking crisis flared up, courtesy of the Silicon Valley Bank (SVB) and Signature Bank collapse. The US banking sector stress revived expectations of a pause in the US Federal Reserve (Fed) tightening cycle, even putting 25 basis points (bps) March Fed rate hike bets off the table. This helped the GBP/USD pair extend its previous week’s recovery and briefly recaptured the 1.2200 mark.

The United States bond market witnessed an intense rush for safety following the SVB fallout, prompting a sharp sell-off in the US Treasury bond yields across the curve. The two-year US Treasury bond yields eroded as much as 60 bps to breach the 4.0% level on Monday, registering its biggest multi-day decline since 1987. The benchmark 10-year Treasury bond yields breached the 3.50% key level.

The US Dollar Index tumbled to monthly lows near 103.50 but staged a solid comeback midweek after the US authorities immediately pledged support for other lenders and depositors. Additionally, the expectation of a 25 bps increase in the March Fed rate hike was heightened due to the persistent United States Consumer Price Index (CPI). On an annualized basis, the US Consumer Price Index data came in at 6.0% in February vs. 6.0% expected and 6.4% previous. The headline CPI data stood at 0.4% MoM in February vs. 0.4% expected, compared with a 0.5% increase reported in January. The Core CPI came in at 0.5% MoM in the reported month vs. 0.4% expected and 0.4% previous.

On Wednesday, the banking crisis returned to the fore, this time from Europe, as investors fretted about whether the US SVB turmoil reached European shores. Saudi National Bank, the largest shareholder of Credit Suisse Group AG, ruled out another call for additional liquidity due to regulatory issues. Credit Suisse slid as much as 24% to a new record low, as the credit default swaps tied to bonds issued by the troubled bank soared to record levels. Demand for safe havens, such as Gold price, the US Dollar and the US government bonds, shot through the roof as global stocks and yields collapsed. The US Dollar turnaround picked up steam across the board, as the greenback reversed all of its previous losses. Cable, therefore, tumbled to hit fresh multi-day troughs at 1.2010, undermined by a broadly firmer US Dollar and absence of demand for risk assets.

While fears over the Credit Suisse debacle eased on Thursday, in light of the $54 billion borrowing from the Swiss National Bank (SNB), concerns over the United States banking sector re-emerged after First Republic Bank plunged into crisis following a downgrade by S&P. Shares of First Republic crashed over 62% in the last five days, triggering fears among investors that it may also collapse. The US Dollar once again faced selling pressure and weakened further on the final trading day of the week, as risk sentiment improved after the Federal Reserve, the Department of the Treasury, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) announced a massive deposit by11 banks into the First Republic Bank. That helped the GBP/USD pair to add to its weekly gains.

Amidst the global banking sector turmoil, investors shrugged off the UK’s Budget and the employment report, as they started pricing a 25 bps rate hike by the Bank of England (BoE) next week. Meanwhile, the European Central Bank (ECB) stuck to the planned 50 bps rate hike plan but failed to impress Euro traders, as it offered no commitments for the future.

On Friday, the University of Michigan's Consumer Sentiment Survey for early March showed that the Consumer Confidence Index edged lower to 63.4 from 67 in February. Moreover, year-ahead inflation expectation component dropped to its lowest level since April 2021 at 3.8% from 4.1% in February, not allowing the US Dollar to gather strength ahead of the weekend.

Federal Reserve and Bank of England to steal the show

Central banks’ decisions are likely to dominate the GBP/USD price action in the week ahead, as the dust settles over the latest global banking crisis. Concerns over banking sector risks worldwide will continue lurking in a quiet start to an action-packed week.

Monday is devoid of any high-tier economic data releases from the United States and the United Kingdom but the developments surrounding the Credit Suisse and the US banking turmoil will be closely followed, with investors hoping no further scrambling over the weekend.

Tuesday is also quiet, data-wise, on both sides of the Atlantic, as investors gear up for key event risks on Wednesday. The United Kindom’s Consumer Price Index (CPI) will feature on Wednesday ahead of the all-important Federal Reserve policy decision. The UK annualized Consumer Prices Index (CPI) softened to 10.1% in January against the 10.5% increase recorded in December, the UK Office for National Statistics (ONS) reported. The market consensus was for a 10.3% print.

Meanwhile, the Fed is on track to hike rates by 25 bps at the March 22 meeting. The Bank of England is also seen hiking rates by 25 bps at its policy meeting on Thursday. The central banks’ events are likely to ramp up volatility around the GBP/USD pair in the face of the recent banking sector turmoil globally. It’s not a ‘Super Thursday’, as there is no press conference from BoE Governor Andrew Bailey following the policy announcements.

The US will report the weekly Jobless Claims and New Homes Sales on Thursday, while BoE policymaker Catherine Mann’s take on the policy decision will be closely awaited later in the day. The week is also likely to end with a bang, with the releases of the S&P Global Preliminary Manufacturing and Services PMIs from both the US and the UK. Additionally, the US calendar will also see the Durable Goods Orders data due for publication. The UK Retail Sales data will kick off a data-busy Friday.

GBP/USD: Technical outlook

 
GBP/USD: Daily chart

GBP/USD remained supported above the critical 100- and 21-Daily Moving Averages (DMA) at 1.2048 and 1.2025, respectively, throughout the week.

Pound Sterling bulls, therefore, staged a comeback to recapture the horizontal 50 DMA at 1.2140.

A weekly closing above the latter will initiate a fresh uptrend toward the 1.2400 barrier. However, GBP/USD will need to find acceptance above the March 14 high of 1.2204 and the Valentine’s Day high of 1.2269  for sustained upside.

The 14-day Relative Strength Index (RSI) is holding firmer above the 50.00 level, suggesting that GBP/USD remains poised for additional upside.

On the flip side, the initial support is seen at the bullish 100 DMA, below which the 21 DMA support will be put to test.

A decisive break below the latter will re-open floors toward the mildly bearish 200 DMA at 1.1891. Further south, the year-to-date low at 1.1802 could come to the buyer’s rescue. 

GBP/USD: Forecast poll

FXStreet Forecast Poll shows that only a small percentage of polled experts see GBP/USD having the potential to continue to stretch higher next week. The one-week average target is located at 1.2059. The one-month outlook paints a similar picture with an average target of 1.2085.