GBP/USD Analysis: Lacks bullish conviction despite UK budget U-turn, softer USD

The GBP/USD pair struggles to capitalize on its recent strong gains recorded over the past week or so and oscillates in a narrow trading band through the early European session on Tuesday. The British pound draws support from the fact that the new Chancellor of the Exchequer Jeremy Hunt reversed the majority of the tax cuts announced by his predecessor and provided reassurance to markets. Apart from this, some follow-through US dollar selling is seen as another factor acting as a tailwind for the major.

Following the recent extreme volatility, the global risk sentiment seems to have stabilized amid the optimism over the UK government's decisions to put the fiscal trajectory on a more sustainable path. Furthermore, the Chinese government unveiled plans for more stimulus spending and the People’s Bank of China kept monetary policy at accommodative levels to support economic growth. The combination of factors boosted investors' confidence, which is evident from the risk-on mood and is weighing on the safe-haven buck.

Adding to this, the Bank of England (BoE) Governor, Andrew Bailey, warned earlier this week that interest rates may need to rise by more than previously expected. The markets were quick to react and are now pricing in the possibility of a jumbo 100 bps BoE. The GBP/USD pair, however, lacks bullish conviction amid reports that the UK central bank is set to further delay quantitative tightening to help stabilize bond markets. This, along with the UK political uncertainty, keeps a lid on the GBP/USD pair, at least for the time being.

In fact, rebels within the ruling Tory Party are coming together to replace the newly-elected UK Prime Minister Liz Truss in the wake of the recent  tax cut fiasco. Moreover, the prospects for a more aggressive policy tightening by the Federal Reserve remain supportive of elevated US Treasury bond yields and offers support to the USD. Moreover, concerns about the economic headwind stemming from rapidly rising borrowing costs, geopolitical risk and China's strict zero-COVID policy helps limit the USD losses and warrants caution before placing fresh bullish bets around the GBP/USD pair and positioning for further near-term apprecaiting move. 

In the absence of any major market-moving economic releases from the UK, traders now look to the US economic docket, featuring Industrial Production figures and Capacity Utilization Rate. Apart from this, the US bond yields and the broader market risk sentiment will influence the USD price dynamics, producing short-term trading opportunities around the GBP/USD pair.

Technical Outlook

From a technical perspective, the overnight swing high, around the 1.1440 region, now seems to act as an immediate resistance ahead of the monthly peak, nearing the 1.1500 psychological mark. The latter coincides with the 50-day SMA, which if cleared decisively should pave the way for an extension of the recent strong recovery from an all-time low. The GBP.USD pair might then accelerate the move towards the 1.1555-1.1560 intermediate resistance before aiming to reclaim the 1.1600 round figure.

On the flip side, sustained weakness below the 1.1300 mark would expose the 1.1200 level. The next relevant support is pegged near the mid-1.1100s, below which the GBP/USD pair could turn vulnerable to test the 1.1100 mark and the 1.1055-1.1050 support zone. Failure to defend the said support levels will negate any near-term positive outlook and shift the bias back in favour of bearish traders.