GBP/USD recovery intact but facing resistance overheadTechnical obstructions near 1.2305 & 1.2387 may stymieDissipating Fed hawkishness supports GBP/USD at 1.21Market concern over banking sector a brake on recoveryBoE speeches in focus for GBP as USD eyes core PCE

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The Pound to Dollar exchange rate has come close to stalling in its March rally but ebbing concerns about the banking sector and dissipating hawkishness of the Federal Reserve (Fed) could support Sterling above 1.21 this week while keeping attention on a pocket of technical resistances just above 1.23.

Sterling was hobbled near two-month highs against the Dollar last Friday as financial markets asked questions about the stability of a large German bank, leading to widespread losses for risky assets while lifting U.S. exchange rates from the lows seen after Wednesday's Fed decision.

Dollar exchange rates had fallen previously when the Fed raised its Fed Funds rate to between 4.75% and 5% but indicated with updated forecasts that only one further increase is likely before year-end, due partly to the adverse effects of recent turbulence in the banking sector.

"USD is likely to remain heavy this week in our view. Markets continue to pull down US 2-year bond yields because of expectations of rate cuts by the FOMC. The sharply lower 2 year yields has weighed on the USD," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

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.

The failure of Silicon Valley Bank and others earlier in March is expected to stifle lending to companies and households with this in turn seen as having an adverse impact on economic growth and a dampening effect on inflation up ahead.

"If we need to raise rates higher, we will. I think for now though, we, as I've mentioned, we see the likelihood of credit tightening," Fed Chairman Jerome Powell said at last Wednesday's press conference.

"We know that that can have a, you know, an effect on the macro economy, on demand, on labor market conditions and we're gonna be watching to see what that is," he added in response to questions from reporters.

The Fed's willingness to rely on "credit tightening" to bring down inflation has negative implications for the U.S. Dollar because it deprives the greenback of the support that would otherwise be gained from additional or better-sustained increases in government bond yields.

Above: Futures market implied expectations for Fed Funds interest rate later this year. Click image for closer inspection.

"According to Chair Powell the recent tightening in credit conditions added the equivalent of a 25bp hike or more and this was a factor in deciding to keep the projection of the terminal fed funds rate unchanged from the December forecast of 5.1%," says Tom Kenny, a senior economist at ANZ.

The Fed's focus on the potential for credit tightening to do the work of higher interest rates is positive for the Pound, which could now benefit if and when market concerns about the stability of the European banking sector ebb.

Whether it's able to advance sustainably beyond nearby technical resistances at 1.2305 and 1.2387 remains to be seen but any losses could be limited the 50-day and 100-day moving averages at 1.2148 and 1.2098 in the days ahead.

"There is no important UK economic data scheduled this week. However, several Bank of England (BoE) officials speak, including Governor Bailey tomorrow. Topics for discussion are likely to include last week’s ‘dovish’ 25bp rate hike," Commonwealth Bank of Australia's Capurso says.

Above: Financial model-derived estimates of probable trading ranges for selected currency 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.)

"If the speeches send the message that the BoE is close to, or at a place where they expect to pause the tightening cycle, market pricing for the bank rate and GBP/USD can ease. We expect the BoE to leave interest rates on hold over the rest of the year," Capurso adds in a Monday research briefing.

1.2305 level marks the 50% Fibonacci retracement of the Pound to Dollar downtrend from May 2021, which was shortly before the Fed first signaled a hawkish turn in its post-pandemic policy stance, although the resistance here is reinforced by the 61.8% retracement of February 2022 downtrend at 1.2387.

One or the other of these levels would likely limit fresh and further rallies in the absence of broad losses for the Dollar and unless Bank of England (BoE) Governor Andrew Bailey provides the market with reason to be more enthusiastic about Sterling this Monday or Tuesday.

Governor Bailey is set to address the London School of Economics at 18:00 on Monday before appearing in front of the House of Commons Treasury Select Committee at 09:45 on Tuesday and just days after the BoE gave no clear signal on whether it would be likely to raise interest rates again.

Above: GBP/USD at daily intervals with selected moving averages and Fibonacci retracements of September 2022 and March 2023 rallies indicating possible areas of technical support for Sterling. To optimise the timing of international payments you could consider setting a free FX rate alert here.

The highlight of the week for the Dollar, meanwhile, is Friday's release of the Fed's preferred measure of inflation in the form of the Core PCE Price Index although there is uncertainty about what a stronger-than-expected number would mean for U.S. exchange rates.

Economists are looking on average to see the index remain unchanged at 4.7% for the year to the end of February, aided by a month-on-month increase of 0.4%, which would be down from 0.6% previously.

"Recent developments have also taken some of the focus away from upside risks to the inflation outlook," says Lee Hardman, a currency analyst at MUFG.

"While the BoE and Fed continued to hikes rates this week in response to more persistent inflation risks, market participants are not as convinced that central banks will need to tighten policy much further if credit conditions tighten as well in response to the loss of confidence in the banking system," he adds.