GBP/USD Weekly Forecast: Eyes big technical breakout with both central banks scheduled to meet

• GBP/USD ended the week modestly flat, still capped by 1.2450.
• Federal Reserve, Bank of England divergence could hold the key ahead.
• GBP/USD looks to confirm a Cup-and-Handle formation on the daily chart.

GBP/USD ended the week almost unchanged, despite the persistent weakness in the United States Dollar (USD). Renewed Brexit concerns capped the Pound Sterling bulls at a critical daily resistance. The United States and the United Kingdom's central banks' policy announcements will hold the key in the week ahead.

GBP/USD bulls tamed at 1.2450 yet again

The Pound Sterling clinched fresh seven-month highs against the United States Dollar (USD) at the start of the week. But bulls failed to sustain at higher levels, as GBP/USD ran into the critical 1.2450 resistance once again. The GBP/USD correction from the multi-month peak extended in the initial part of the week but Pound Sterling bears were swept off their floors around the 1.2250 region, fuelling another run above 1.2400. 

Choppy trading in the US Dollar left the GBP/USD largely in an upside consolidative mode within a 200 pips range. Heightening expectations of a slowdown in the US Federal Reserve (Fed) tightening pace weighed down on the American Dollar alongside the US Treasury bond yields, as markets fully priced in a 25 basis points rate hike for February. Further, the odds of a total of 50 bps Fed rate increments at the next two policy meetings stood at 80%. Meanwhile, the latest Reuters poll of economists suggested a pause in the Federal Reserve's rate hike track.

The dovish Fed expectations were only strengthened following the release of the first estimate of the United States Gross Domestic Product (GDP) on Thursday, which surpassed expectations of 2.6% to arrive at 2.9% YoY vs. the 3.2% clip. Despite the upbeat growth numbers, the weak US Jobless Claims and business activity data continued to signal a slowdown in the world's largest economy. The United States Dollar, however, staged a decent comeback from eight-month lows as investors resorted to positions readjusting ahead of the next US Federal Reserve policy meeting. This allowed the GBP/USD pair to stay afloat near the 1.2400 barrier.

The data from the US showed on Friday that the Core Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred gauge of inflation, declined to 4.4% on a yearly basis in December from 4.7% in November. This print came in line with the market expectation and failed to trigger a significant market reaction.

On the British Pound side of the equation, Brexit concerns and political jitters in the United Kingdom resurfaced and kept the upside attempts limited in the GBP/USD pair. Bloomberg report that Ireland and the UK shared a determination to secure an agreement on post-Brexit trading arrangements, Irish Finance Minister Michael McGrath said, following his first meeting with Chancellor of the Exchequer Jeremy Hunt on Thursday. Hunt also angered right-wing Tory MPs by rejecting calls for big tax cuts in his Budget, insisting he can grow the economy without another wave of debt-funded fiscal loosening, as cited by the Financial Times (FT). Pound Sterling optimists also remained wary ahead of the critical Bank of England rate hike decision, with the central bank widely expected to deliver another 50 bps rate increase.

Eyes on Bank of England, Federal Reserve policy outcomes

Investors brace for a quiet start to a bumper week ahead, as the US Federal Reserve and Bank of England policy meetings are likely to stand out alongside the United States Nonfarm Payrolls data.

It's worth noting that Chinese traders will return after a week-long Lunar New Year holiday, reviving volatility across the financial markets.

Monday is data-dry on both sides of the Atlantic while Tuesday will feature the United States Conference Board Consumer Confidence data and some other minority reports.

The focus will shift toward Wednesday's ISM Manufacturing PMI, Final Manufacturing PMI and the JOLTS Job Openings data from the United States ahead of the all-important US Federal Reserve policy announcements. GBP/USD could see a big reaction to the Fed outcome and Chair Jerome Powell's speech for fresh hints on the Federal Reserve's outlook on its tightening cycle.

Although the reaction could be temporary, as GBP/USD traders will switch their attention toward Thursday's Bank of England interest rate decision. This will be a 'Super Thursday' as the BoE will be releasing an inflation report or economic forecasts alongside its decision, followed by Governor Andrew Bailey's speech. The European Central Bank (ECB) is also set to make its policy announcement on the same day promising substantial market volatility. Meanwhile, the weekly Jobless Claims and Factory Orders will drop from the United States on Thursday.

With the central banks out of the way, Friday will see the US Nonfarm Payrolls release in the spotlight, followed by the ISM Services PMI. All in all, it will be a big week, which will set the path for the US Dollar for the coming weeks. 

GBP/USD: Technical outlook

GBP/USD: Daily chart

Running into the 1.2450 horizontal resistance for over a week, GBP/USD has entered a phase of consolidation, gathering strength for a sustained break above the latter.

Daily closing above the aforesaid hurdle will validate a Cup and Handle formation, fuelling a fresh uptrend toward the June 2022 high of 1.2599.

Pound Sterling bulls, however, could face stiff resistance at the 1.2500 round figure on the renewed upside.

The 14-day Relative Strength Index (RSI) continues to hold well above the midline, adding credence to the bullish momentum in the GBP/USD pair.

Failure to take out the powerful resistance at 1.2450 decisively could trigger a sharp correction toward the weekly low of 1.2263. The next stop for bears is envisioned at the ascending 21-Daily Moving Average (DMA) at 1.2219.

The bullish 50 DMA at 1.2163 could be tested as credible support should the correction deepen. 

GBP/USD: Forecast poll

FXStreet Forecast Poll fails to provide a directional clue for the pair in the short term as the one-week average target aligns at 1.2370, near GBP/USD's weekly closing level. The one-month outlook remains overwhelmingly bearish with only 29% of polled experts expecting bullish action in that time frame.