• GBP/USD supported near 1.2371 with risk on upside
• Further supports below at 1.2263 & 1.2221 on charts 
• Breaking 1.2511 resistance brings 1.2750+ into view 
• U.S. inflation, Q1 GDP & debt ceiling debacle ahead

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The Pound to Dollar exchange rate has appeared to establish a foothold above the 1.24 handle in recent trade and could rise further in the days and weeks ahead, although White House and Congressional politics are much greater upside risks than any of the appointments sitting in the economic calendar.

Dollars were bought widely last week but the greenback ended lower in relation to Sterling, which outperformed all others in the G10 basket while giving ground to the Russian Rouble and Polish Zloty on the G20 board.

Gains were helped when a slovenly decline in UK inflation lifted implied expectations for the Bank of England (BoE) Bank Rate but U.S. economic and the possibly underappreciated risk of a technical debt default by the U.S. government will matter much more than these for the Dollar up ahead.

"Rate hike expectations can support GBP around 1.2500 this week in the absence of any important UK economic data," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

"USD and US interest rates will be influenced by a variety of economic data released near the end of the week. We estimate Q1 23 GDP and employment costs will print below consensus expectations," he adds in a Monday briefing. 

Above: Pound to Dollar rate shown at 4-hour intervals with Fibonacci retracements of March rally indicating possible areas of technical support for Sterling. Click for closer inspection.

The consensus among economists is that Bureau of Economic Analysis figures will show the U.S. economy expanding at an annualised pace of 2% in the opening quarter on Thursday, down from 2.6% late last year.

This suggests downside risk for the Dollar and upside risk for the Pound if the CBA team is on the money with its forecast.

"People’s willingness to run down some of the huge stock of excess savings built up during Covid has largely shielded consumption from the Fed’s aggressive rate hikes," says Ian Shepherdson, chief economist at Pantheon Macroeconomics.

"But over half of this stock now has been spent, and the remainder is concentrated much more among people at the upper end of the income distribution," Shepherdson writes in a Monday research briefing. 

Pantheon tips a second and third-quarter recession for the U.S. - the second in as many years - but Friday's readings of the Employment Cost Index and Core Personal Consumption Expenditures Price Index will be every bit as important as the economic growth numbers in the coming months.

None of those will be nearly as relevant as developments at the White House and in Congress, however, in light of widely reported declines in U.S. Treasury tax collections and the resulting uncertainty about how much longer the government can remain funded without raising the statutory debt limit.

Above: Quantitative model estimates of trading ranges for selected pairs this week. Source Pound Sterling Live. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

The U.S. Treasury reached its debt limit on January 19, 2023, leaving it reliant on incoming tax receipts and other extraordinary measures to remain funded, though some analysts estimate these resources will run out as soon as sometime in June without action from Congress and the White House.

"Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history," the U.S. Treasury explains. 

"That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession," it adds. 

There is always uncertainty over the timing of any increase in the limit but it's much higher this time due to further radical government policy agendas, high and rising expenditures and a hyper-polarised political environment.

Technically it is incumbent on the White House and governing Democratic Party to compromise whenever and wherever opposition votes are required.

Above: Pound to Dollar rate shown at weekly intervals with Fibonacci retracements of selected downtrends indicating various areas of technical resistance for Sterling. Selected moving averages denote possible support or resistance.

But it's far from obvious whether any of the parties involved will be able and willing to agree on a proposition with sufficient time left to avoid a technical default.

"The likely significant politicking and concerns about US debt/default risks in the future may further increase the desire to diversify out of the USD (beyond concerns in relation to US financial sanctions risk – example of Russia)," says Jordan Rochester, a G10 FX strategist at Nomura. 

"We have already seen growing evidence of global central banks buying up gold as an example of diversification, but non-USD assets may broadly benefit – including RMB, following recent announcements from parts of EM and the Middle East,"  Rochester writes in a Friday research note.

While there is still at least one month for a proposal to be agreed, the danger is that all of the above prompts pre-emptive hedging of exposures to the Dollar, leading to gains for other currencies like Sterling and possibly an extension of the already-significant bull run in the price of gold.

Beyond this, any technical default or greater prospect thereof would simply offer comfort and consolation to Russian President Vladimir Putin's righthand man Dmitry Medvedev, who made a whole bunch of dodgy forecasts in December. 

On the New Year’s Eve, everybody’s into making predictions

Many come up with futuristic hypotheses, as if competing to single out the wildest, and even the most absurd ones.

Here’s our humble contribution.

What can happen in 2023:

— Dmitry Medvedev (@MedvedevRussiaE) December 26, 2022