GBP/USD Extends Fed Rate Hike-Inspired Gains To A Three-Week High As Inflation Soars In The U.K

• GBP/USD cross gained positive traction on Thursday and extended the bullish trajectory to a new three-week high
• Fed hikes rates by a quarter percentage point, indicates increases are near an end; shift in policy language sees the treasury bond yields slump and USD weaken significantly
• Inflation jumped in the U.K. Last month, according to the latest inflation figures, adding to market expectations of further rate hikes by the B.O.E.
• The Bank of England (B.O.E.) is set to announce its interest rate decision later today; 25 bps is expected and will act as a key catalyst for directional impetus

GBP/USD pair prolonged the solid bullish momentum witnessed over the past two weeks and gained traction for the ninth successive day on Thursday. The momentum lifted spot prices to a new three-week high around the 1.22977 - 1.23040 levels during the second half of the Asian session.

Declining treasury bond yields as investors digested the Federal Reserve's latest interest rate decision and guidance on the central bank's monetary policy path forced the U.S. Dollar to extend its modest decline, which offered support to the Cable. Apart from this, signs of stability in the U.S. equity markets capped the safe-haven greenback and helped limit the downside for the major.

The U.S. Dollar Index (D.X.Y.), which measures the value of the U.S. Dollar against a basket of currencies, was down 0.3% for the day at $102.196, reversing overnight gains from the vicinity of $102.535 and extending the bearish trajectory to a near seven-week low after the Federal Reserve hiked interest rates as expected. However, some language in the central bank's announcement suggested that interest rates may be close to reaching their peak.

The Federal Reserve on Wednesday raised the fed funds rate by 25 bps to 4.75% - 5% in March 2023, matching the February increase and pushing borrowing costs to new highs since 2007, as inflation remains elevated. In a post-F.O.M.C. meeting, the Federal Open Market Committee noted that future increases are not assured and will depend mainly on incoming data. "The Committee will closely monitor incoming information and assess the implications for monetary policy," the F.O.M.C.'s post-meeting statement said. "The Committee anticipates that some additional policy firming may be appropriate to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time."

The U.S. Central Bank further cautioned about the recent banking crisis and indicated that hikes are nearing an end. The decision, however, came in line with expectations from most investors, although some believed the central bank should pause the tightening cycle to shore up financial stability. The Fed noted the U.S. banking system is sound and resilient. Recent developments in the banking sector are likely to result in tighter credit conditions for households and businesses and weigh on economic activity, hiring, and inflation.

Meanwhile, the Fed funds rate is seen reaching 5.1% this year, the same as in the December projection, and to end 2024 slightly higher at 4.3%, compared to 4.1% and to fall to 3.1% in 2025, the same as seen in December. PCE inflation forecasts were raised for this year (3.3% vs 3.1%) but were kept steady for 2024 (2.5%). The economy is growing slightly less in 2023 (0.4% vs 0.5%) and next year (1.2% vs 1.6%). It is worth noting, Just a few weeks ago, many investors believed Fed officials would re-accelerate the pace of rate hikes and announce a 50 basis point increase. Fed Chair Jerome Powell hinted at higher rates than expected and indicated that the Fed's efforts to cool the economy were ongoing. The personal consumption expenditures price index, a favourite inflation gauge for the Fed, rose 0.6% in January and was up 5.4% from a year ago — 4.7% when stripping out food and energy. 

However, the recent turmoil in the banking sector after the failures of Silicon Valley Bank and Signature Bank and Credit Suisse's takeover by UBS shifted investor sentiment. Many now believe the Fed will favour stability and opt for a smaller rate hike. Shifting to the U.K. docket, the latest U.K. Inflation data showed red-hot inflation continued to surge in the U.K. last month. The annual inflation rate in the U.K. unexpectedly edged higher to 10.4% in February of 2023 from 10.1% in January, the first increase in four months and compared to forecasts of 9.9%, according to a report released on Wednesday by the U.K. office of National statistics. Compared to January, the C.P.I. jumped 1.1%, the most significant rise in four months. 

In other news Producer input prices in the United Kingdom fell by 0.1 percent from a month earlier in February 2023, following an upwardly revised 0.4 percent rise in January, and compared to market consensus of a flat reading. 

However, the mixed U.K. macroeconomic data would dash any hopes that the B.O.E. would consider a pause in rate hikes, especially with inflation numbers being stronger in February after falling in January. Additionally, last week's banking crisis that threatened to disrupt financial markets severely should leave no room for B.O.E. pivoting. It is worth noting the U.K. Finance Minister, in his spring budget announcement last week, said "that the independent Office for Budget Responsibility had now forecast that the U.K. economy would not enter a technical recession in 2023, as was previously anticipated. Inflation is now predicted to fall from 10.7% in the final quarter of 2022 to just 2.9% by the end of 2023.

With sticky red-hot inflation still in the cards despite the U.K. government predicting it would fall gradually, B.O.E. officials will have a severe headache of today's B.O.E. Interest rate decision on raising interest rates per the market expectations of 25 bps or lifting it further beyond. Either way, time will tell; however, a hawkish stance by Bailey and his colleagues will see the British Pound rise significantly, while a dovish stance preceded by a 25 bps will see the Cable price slump considerably, in turn exerting downward pressure on the GBP/USD pair.

Technical Outlook: Four-Hour GBP/USD Price Chart

From a technical standstill, GBP/USD pair extended the modest rebound from the firm rejection at the 20 E.M.A. level at 1.22182 level touched yesterday during the mid-European session. Some follow-through buying would confront resistance at the 1.233660 level. A decisive flip of this hurdle into support would negate any near-term bearish outlook. GBP/USD pair could then accelerate towards retesting the key resistance level plotted by an ascending trendline extending from the early-March 2023 swing Higher-highs. Sustained strength above this resistance level (bullish price breakout) would pave the way for aggressive technical buying around the GBP/USD pair. The bullish trajectory could then accelerate towards the next relevant hurdle at the 1.24027 level.

All of the technical oscillators on the chart are in dip bullish territory, with both the R.S.I. (14) at the 64.7698 level and the M.A.C.D. crossover sitting above their signal lines, indicating a bullish sign of price action this week. The bullish bias is further supported by the acceptance of the price above the technically strong 200 (yellow) E.M.A. level at 1.20653. Additionally, the 50 and 200 E.M.A. crossover (Golden Cross) at the 1.20683 level adds credence to the bullish bias.

Conversely, if dip-sellers and tactical traders jump back in and trigger a bearish reversal, the price will first find support at the 1.22854 support level. On further weakness, the GBP/USD pair could nose-dive to tag the 20 E.M.A. (blue) support level at 1.22451. Acceptance below this level would pave the way for a drop toward retesting the key support level plotted by an ascending trendline extending from the early March 2023 swing Lower-Lows. A convincing break below this level (bearish price breakout) would pave the way for aggressive technical selling around the GBP/USD pair.