The GBP/USD exchange rate came close to halting its March rally, but easing concerns about the banking sector and easing Fed tightening could support the pound above $1.21 this week with an eye on a pocket of technical resistance above 1.23. At the beginning of this week's trading, the GBP/USD exchange rate stabilized in a range between 1.2219 and the resistance level 1.2293 and settled around 1.2270 at the time of writing the analysis.

All in all, the pound sterling stumbled near two-month highs against the dollar last Friday as financial markets raised questions about the stability of a major German bank. This is leading to widespread losses for risky assets as US exchange rates lifted from their lowest levels after the Fed's decision. US dollar exchange rates had previously fallen when the Fed raised the federal funds rate to between 4.75% and 5%, but indicated with updated forecasts that only one increase is likely before the end of the year, due in part to the negative effects of recent turmoil in the US banking sector.

Commenting on this, Joseph Capurso, Head of International Economics at the Commonwealth Bank of Australia, said: “The US dollar is likely to remain heavy this week in our view. Markets continue to cut the two-year US bond yields due to expectations of interest rate cuts by the Federal Open Market Committee (FOMC). The sharp drop in 2-year yields weighed on the US dollar.”

The failure of the Silicon Valley Bank and others earlier in March is expected to hamper lending to businesses and households, with this in turn having a negative impact on economic growth and a dampening effect on future inflation. For his part, Federal Reserve Chairman Jerome Powell said at the press conference last Wednesday: “If we need to raise interest rates, we will do so. I think right now, as I mentioned, we see the potential for a tightening of credit.”

"We know this could have an impact on the macro economy, on demand, on labor market conditions, and we'll be watching to see what that is," he added, in response to reporters' questions.

The Fed's willingness to rely on “credit tightening” to lower inflation has negative implications for the US dollar because it deprives the US dollar of support that would otherwise be gained from additional or better sustained increases in government bond yields. Tom Kenny, ANZ Senior Economist, says: “According to Chairman Powell, the recent tightening in credit conditions added the equivalent of a rise of 25 basis points or more, and this was a factor in the decision to keep the final Fed funds rate forecast unchanged from the December forecast. amounting to 5.1%.

Overall, the US Federal Reserve's focus on potential credit tightening to do the job of raising interest rates is positive for the Sterling, which could now benefit if and when market concerns about the stability of the European banking sector subside. Whether it is able to sustainably advance beyond the nearby technical resistance at 1.2305 and 1.2387 remains to be seen but any losses may be limited by the 50 and 100 day moving averages at 1.2148 and 1.2098 in the coming days.

There are no significant economic data scheduled in the UK this week. However, several BoE officials, including Bank Governor Bailey, are speaking tomorrow. Topics for discussion are likely to include last week's 'peaceful' rate hike of 25 basis points, and if the rhetoric sends the message that the Bank of England is close to it, or in a place where they expect to pause the tightening cycle, then market prices for the bank rate and pound could fall. We expect the BoE to leave interest rates on hold for the remainder of the year.

According to technical analysis

• Level 1.2305 marks the 50% Fibonacci retracement of the GBP/USD downtrend from May 2021.
• This was shortly before the Fed first signaled a hawkish shift in post-pandemic policy stance, although resistance here has been reinforced from the 61.8% retracement of February 2022 downtrend at 1.2387.
• Therefore, it is likely that one of these levels or that will limit new highs and more in the absence of widespread losses for the dollar and unless BoE Governor Andrew Bailey provides a reason for the market to be more enthusiastic about the pound on Monday or Tuesday.

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