GBP/USD Rate Testing Key Level on Charts in Bid for 2023 Highs

"1.2450 the key in that pair with a break there opening a push through 1.2500 and likely up to 1.3000" - Jefferies.

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The Pound to Dollar exchange rate came within arm's reach of year-to-date highs when testing a major technical resistance level on the charts in the penultimate session of the week but will risk upset on Friday when the Federal Reserve's (Fed) preferred reading of inflation is announced.

Dollars were sold widely again to the broad benefit of Sterling, which remained among the top-performing currencies in the G10 and G20 baskets on Thursday including after the Bureau of Economic Analysis revised down its estimate of U.S. GDP growth for the final quarter.

"The reported real GDP growth rate overstates the strength of the economy at the end of last year. Real consumer spending grew only 1.0%, and an inventory build boosted topline GDP growth by 1.5 percentage point," says Jay Bryson, chief economist at Wells Fargo.

"Profitability looks set to slow and weigh on new capital expenditures and hiring. Slowing demand means firms will find it more difficult to pass on still-elevated costs to consumers. We expect profits to decline further over the course of this year," Bryson and colleagues add. 

U.S. growth was restated as 2.6% on Thursday after previously being estimated at 2.7% but was already widely expected to slow further this year over the course of the year even before this month's failure of Silicon Valley Bank and subsequent impacts on the broader banking sector.

Above: GBP/USD at daily intervals with U.S. Dollar Index and Fibonacci retracements of June 2021 and February 2022 downtrends indicating possible areas of technical resistance for Sterling. Click image for closer inspection.

"Weekly data on bank deposits in the US only goes up to March 15, but shows outflows of US$120bn from small banks and inflows of $67bn into larger banks, indicating a flight to larger banks was underway in this period," says Adam Slater, a lead economist at Oxford Economics. 

"Fed liquidity loans to banks soared by over US$300bn to US$350bn by March 22, while the assets of money market funds (MMFs) rose by US$240bn from Mar 8 to Mar 22 – indicating some flight from bank deposits into a close substitute product," he adds in a Wednesday research briefing.

The dimming U.S. growth outlook has become more burdensome for the Dollar and further supportive of the Pound since Fed Chairman Jerome Powell suggested last week that turbulence in the banking sector could do the work of interest rates by helping to bring inflation down up ahead. 

The idea is that reduced lending and lessened availability of credit would dampen the economy enough to keep companies from raising prices, although this is negative for the Dollar because it precludes additional or otherwise better-sustained increases in government bond yields.

Above: GBP/USD at weekly intervals with Fibonacci retracements of June 2021 and February 2022 downtrends indicating possible areas of technical resistance for Sterling, and including selected moving averages. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

This has all left little to keep the Sterling-Dollar pair from testing significant resistance levels on the charts this week but Friday's Core Personal Consumption Expenditures Price Index readubg could yet interrupt the rally. 

Economists are looking to see the Fed's preferred measure of inflation remain unchanged at 4.7% for the year to the end of February and any stronger-than-expected outcome could lead financial markets to rethink the popular assumption that no further increases in U.S. interest rates are likely.

That sort of outcome might be enough to ensure the Pound-Dollar rate remains contained by the Fibonacci resistance at 1.2378 into the weekend, while softer-than-expected numbers would be a potential catalyst for a break above there and subsequent attempt at recovering the 1.25 level.

"GBP/USD sitting at 1.2347 is near the highs that were tested back in the Fall," says Brad Bechtel, global head of FX at Jefferies.

"1.2450 the key in that pair with a break there opening a push through 1.2500 and likely up to 1.3000. I don't think we'll get that break higher unless we see a sudden and significant shift in Fed policy," he adds.