GBP/USD's rebound from early March lows faltered around 1.33 and around a notable level of technical resistance on the charts last week, leaving it vulnerable to a deeper setback over the coming days. At the beginning of this week's trading, the pair collapsed to the vicinity of the support 1.3066, before settling around the 1.3100 level at the time of writing the analysis. The British pound rose strongly from the opening last week before being forced to retreat when the dollar stabilized after the comments of Federal Reserve Chairman Jerome Powell and with the pound weakening in the wake of the February inflation figures.
Inflation in the UK surprised the upside of market expectations when it rose from 5.5% to 6.2% despite the decline in the GBP/USD and other GBP pairs during the following trading session. This response could be a symptom of uncertainty over whether the Bank of England (BoE) will meet market expectations of a bank interest rate in the coming months. There is uncertainty emerging as the Federal Reserve increasingly warns that it may raise rates. The US market will be faster than the market expects in the near future.
The dollar found its feet against the British pound, the euro and the Japanese yen after Chairman Jerome Powell told the National Association of Business Economics conference last Tuesday that the Federal Reserve may raise the US interest rate by 0.50% on more than one occasion in the coming months. Since then, prices in the swap markets have shifted to imply a high probability of a Fed funds rate hike from 0.5% to 1% in May, but stopped short of indicating that this is uncertain, which is a lingering bullish risk for the dollar.
Jerome Powell said, “I don't have a test here to see what that's going to lead to, but the expectation going into this year was that we'll see inflation peak in the first quarter and maybe level off and then see a lot of progress in the second half.” He added, “That story has really broken down.” To the extent that my colleagues continue to disintegrate, I may come to the conclusion that we will need to move more quickly, and if that is the case we will.
Expectations for the federal funds rate may be sensitive to Thursday's core PCE price index for February, the Fed's preferred measure of inflation and its final reading is likely to appear before the Russian invasion of Ukraine. The invasion has sharply raised global energy and food costs, is widely expected to push up inflation further worldwide in the coming months and has proven to be a headwind for the sterling price as well.
According to the technical analysis of the pair: On the daily chart below, it seems clear that the bears may head in the price of the GBP/USD currency pair towards the 1.3000 psychological support level again unless the sterling gains momentum to stop the pace of its losses. A dollar from each ascending level is the most prominent performance in light of the continuation of the Russian war and its negative repercussions on the global and European economy in particular. Breaking the 1.3000 support will increase the pair's suffering and therefore move strongly to the downside. On the other hand, and over the same period, the resistance 1.3335 will be important for the upward trend.