GBP/USD Forecast: 1.2200 may prove to be a tough resistance to crack

GBP/USD has steadied below 1.2200 in the European session.
DXY is struggling to build on Tuesday's gains ahead of US Services PMI data.
Investors could stay on the sidelines ahead of BOE's policy announcements.

Eren Sengezer FXStreet

GBP/USD has been fluctuating in a tight channel below 1.2200 since the beginning of the day on Wednesday. Investors could refrain from betting on renewed pound strength while waiting for the Bank of England (BOE) to announce its policy decisions on Thursday.

Bank of England Preview: Bailey to deal blow to pound with dovish hike, what to watch for.

On Tuesday, the intense flight to safety helped the greenback outperform its rivals. The US Dollar Index (DXY) gained nearly 1% on a daily basis and snapped a four-day losing streak. Ahead of the ISM Services PMI data, however, DXY seems to have gone into a consolidation phase above 106.00, limiting GBP/USD's downside for the time being.

Investors expect the Prices Paid component of the ISM survey to rise to 81.6 in July from 80.1 in June. In case the survey reveals that price pressures remained uncomfortably high in the service sector, the dollar could regather its strength. On Tuesday, several Fed officials reiterated that they remain committed to bringing inflation down and markets could move away from pricing in a 50 basis points rate hike in September.

On the other hand, the sharp drop recorded in the Prices Paid component of the ISM's Manufacturing PMI triggered a dollar selloff on Monday and a similar market reaction could be witnessed if there is an unexpected decline in service sector inflation.

Meanwhile, the data from the UK revealed that the business activity in the UK service sector expanded at its weakest pace in 17 months with the S&P Services PMI declining to 52.6 in July from 54.3 in June. This reading came in weaker than the market expectation and the flash estimate of 53.3.

GBP/USD Technical Analysis

1.2200 (psychological level, 20-period SMA on the four-hour chart) aligns as initial resistance for GBP/USD. In case buyers manage to lift the price above that level and hold it there, additional gains toward 1.2275 (the end-point of the uptrend) and 1.2300 (psychological level) could be witnessed.

On the downside, initial support is located at 1.2160 (Fibonacci 23.6% retracement of the latest uptrend). Below that level, 1.2120 (ascending trend line coming from mid-July, 50-period SMA) aligns as key support, guarding 1.2100 (psychological level, Fibonacci 38.2% retracement) and 1.2075 (200-period SMA).

Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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