- GBP/USD met with aggressive supply on Monday amid strong follow-through USD buying.
- China’s COVID-19 woes, geopolitical risks boosted demand for the safe-haven greenback.
- Bets for additional BoE rate hikes offer support to the Sterling and help limit the decline.
The GBP/USD pair kicked off the new week on the back foot and fell nearly 120 pips intraday amid strong follow-through US Dollar buying for the third successive day. Investors remain worried about headwinds stemming from the worsening COVID-19 situation in China, which led to the imposition of fresh lockdowns in several cities. Adding to this, fears of a further escalation in the Russia-Ukraine conflict took its toll on the global risk sentiment and boosted demand for the safe-haven greenback.
The USD was also underpinned by the recent hawkish signals from several Fed officials, which suggested that the US central bank might still be far from pausing its policy-tightening cycle. In fact, San Francisco Fed President Mary Daly said on Monday that it was premature to take anything off the table regarding the size of the rate hike in December. Moreover, the stronger US Retail Sales data released last week cast doubts on the peak inflation narrative and reaffirmed the Fed's hawkish outlook.
The British Pound, on the other hand, was pressured by a bleak outlook for the UK economy. It is worth mentioning that the UK Office for Budget Responsibility (OBR) now projects the UK GDP to slump by 1.4% next year as compared to a growth of 1.8% forecast in March. That said, expectations that the Bank of England will continue raising rates to combat stubbornly high inflation offered some support to the Sterling and helped limit any further losses for the GBP/USD pair, at least for now.
Spot prices manage to rebound a few pips from the 1.1780-1.1775 area and regain some positive traction during the Asian session on Tuesday. A slight recovery in the risk sentiment prompts some USD selling and offers support to the GBP/USD pair. It, however, remains to be seen if bulls can build on the move-up in the absence of any relevant macro data from the UK. Traders now look to the Richmond Manufacturing Index and speech by Cleveland Fed President Loretta Mester for a fresh impetus.
From a technical perspective, the GBP/USD pair has been oscillating in a familiar range over the past week or so. This constitutes the formation of a rectangle pattern on short-term charts and points to indecision over the next leg of a directional move for the major. Given the recent strong recovery from an all-time low, this might still be categorized as a bullish consolidation phase. Moreover, repeated failures to find acceptance below the 1.1800 mark, along with positive oscillators on the daily chart, support prospects for additional gains.
That said, any subsequent strength is likely to confront stiff resistance near the 1.1900-1.1910 region. Some follow-through buying will mark a breakout through the short-term trading range and lift the GBP/USD pair back towards the 1.1950 zone. The momentum could further get extended towards conquering the 1.2000 psychological mark en route to the monthly peak, around the 1.2025-1.2030 region.
On the flip side, the 1.1780-1.1760 zone now seems to have emerged as immediate strong support. A convincing break below might prompt aggressive technical selling and make the GBP/USD pair vulnerable. Spot prices might then weaken further below the 1.1700 mark and aim to challenge the 100-day SMA support, currently around the 1.1640-1.1635 region. Some follow-through selling will negate any near-term positive outlook and shift the bias in favour of bearish traders.
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