GBP/USD Forecast: Room for correction if BOE signals pause in tightening cycle

• GBP/USD has built on Wednesday's gains, advanced beyond 1.2300 early Thursday.
• Bank of England is forecast to raise its policy rate by 25 bps to 4.25%.
• USD struggles to find demand following Fed's dovish shift.

GBP/USD has preserved its bullish momentum and climbed to fresh multi-week highs above 1.2300 following Wednesday's sharp upsurge. The Bank of England's (BOE) policy announcement is likely to trigger the next big movement in the pair.

On Wednesday, the US Federal Reserve raised its key rate by 25 basis points (bps) to the range of 4.75-5% as expected. In its policy statement, the Fed dropped the comment that ongoing rate increases will be appropriate and adopted a cautious language, saying "some additional policy firming may be appropriate." Additionally, the terminal rate projection in the dot plot stood unchanged at 5.1%.

During the press conference, FOMC Chairman Jerome Powell reiterated that they were not expecting to cut rates this year. Powell, however, further noted that the tightening in credit conditions in the wake of Silicon Valley Bank turmoil could mean that monetary tightening has less work to do.

Following some wild fluctuations during the Fed event, the US Dollar Index stayed under heavy bearish pressure and touched its lowest level since early February below 102.00 early Thursday.

Later in the session, the BOE is forecast to hike its policy rate by 25 bps to 4.25%. Market participants will pay close attention to the vote split. In case the policy statement shows that the decision was taken by a small margin of votes, markets could see that as a sign that the BOE could pause its tightening cycle at the next meeting and vice versa.

BoE Interest Rate Decision Preview: Preparing ground for a rate hike pause in May.

The stronger-than-expected Consumer Price Index figures reminded markets on Wednesday that inflation in the UK remained sticky in February. However, earlier in the month, the UK's Office for National Statistics reported a softening in wage inflation in January. Hence, it will be interesting to see whether the BOE will put more emphasis on wage inflation or price pressures in its policy statement. In case the UK central bank reiterated that inflation dynamics point to the need for additional tightening, GBP/USD could extend its rally, at least in the near term.

GBP/USD Technical Analysis

GBP/USD trades in the upper half of the ascending regression channel coming from early March. Furthermore, the Relative Strength Index (RSI) indicator on the four-hour chart stays below 70, suggesting that there is more room on the upside for GBP/USD before it turns technically overbought.

On the upside, 1.2370 (upper limit of the ascending channel) aligns as next resistance before 1.2400 (psychological level) and 1.2450 (static level from December).

1.2300 (mid-point of the ascending channel, psychological level, former resistance) forms first technical support. A four-hour close below that level could open the door for an extended correction toward 1.2250 (20-period Simple Moving Average (SMA), lower limit of the ascending channel) and 1.2200 (psychological level, static level).