GBP/USD Analysis: Remains at the mercy of USD price dynamics, focus turns to US CPI

The GBP/USD pair struggled to preserve its modest intraday gains and finally settled in the red on Tuesday amid sustained US dollar buying interest. Investors have been pricing in the prospects for an early tapering of the Fed's massive pandemic-era stimulus amid signs of substantial further progress in the labor market recovery. This, in turn, was seen as a key factor that continued acting as a tailwind for the USD and exerted some downward pressure on the major.

Bets for an earlier action by the US central bank were further boosted by Atlantic Fed President Raphael Bostic and Boston Fed President Eric Rosengren's comments on Monday. Separately, Chicago Fed President Charles Evans said on Tuesday that the economy is on track to satisfy the Fed's threshold to begin tapering its $120 billion in monthly purchases of Treasury and mortgage bonds. Evans, however, suggested he was not ready to support announcing a tapering of bond purchases in September.

Nevertheless, the repricing of a sooner than expected policy tightening by the Fed pushed the yield on the benchmark 10-year US government bond to a five-week high of 1.3610%. This was seen as another factor that underpinned the greenback and dragged the pair to over two-week lows during the Asian session on Wednesday. That said, a combination of factors held traders from aggressive bearish bets around the British pound and helped limit any deeper losses for the pair, at least for now.

The declining trend of new COVID-19 cases in the UK and the BoE's hints about modest tightening extended some support to the sterling. It is worth recalling that the BoE raised its inflation forecast at the end of the August policy meeting last Thursday and endorsed market expectations for a rate hike in 2020. This makes it prudent to wait for some follow-through selling before positioning for an extension of the recent pullback from the vicinity of the key 1.4000 psychological mark.

There isn't any major market-moving economic data due for release from the UK on Wednesday, leaving the pair at the mercy of the USD price dynamics. Hence, the focus will remain on the release of the latest US consumer inflation figures, due later during the early North American session. Apart from this, the US bond yields, will influence the USD and produce some trading opportunities around the major.

Short-term technical outlook

From a technical perspective, the overnight move up faced rejection near the 1.3870 horizontal support breakpoint. This, along with a downward sloping trend-line resistance, constituted the formation of a descending triangle on short-term charts. Apart from this, the formation of a double-top near the 1.3980-1.4000 area suggests that the recent strong rebound from the lowest level since early February has run out of steam. Hence, a subsequent fall below the 1.3800 mark, towards testing the next relevant support near the 1.3730-25 region, remains a distinct possibility.

The latter marks the 23.6% Fibonacci level of the 1.4249-1.3572 downfall, which if broken decisively would turn the pair vulnerable to break below the 1.3700 mark. The downward trajectory might then drag the pair back towards the 1.3620-15 intermediate support en-route the 1.3600 round figure and July monthly swing lows, around the 1.3570 region.

On the flip side, the 1.3870 support-turned-resistance might continue to cap any attempt recovery move. Any subsequent move up might be seen as a selling opportunity near the 1.3900 mark and cap the pair near the 1.3910-15 confluence hurdle, comprising of 50% Fibo. level and the 100-day SMA.