GBP/USD Forecast: Acceptance above 1.2600/38.2% Fibo. favour bulls amid weaker USD

GBP/USD edged higher on Monday amid sustained USD selling, though lacked follow-through.
Reduced bets for a more aggressive Fed rate hike, the risk-on mood weighed on the greenback.
Recession fears, Brexit woes kept a lid on any further gains for the British pound and the pair.

Haresh Menghani FXStreet

The GBP/USD pair edged higher on the first day of a new week, albeit lacked follow-through buying and remained below a one-month peak touched on Friday. Market participants now expect that the Fed could pause the rate hike cycle after two 50 bps hikes each in June and July in order to prevent the economy from tipping into recession. The bets were reaffirmed by Friday's release of the US Personal Consumption Expenditure (PCE) data for April, which suggested that inflationary pressures in the US could be easing.

Apart from this, the risk-on mood weighed on the safe-haven US dollar and acted as a tailwind for the major. Investors turned optimistic amid hopes that the easing of COVID-19 restrictions in China would boost the global economy. The British pound was further underpinned by expectations that UK Chancellor Rishi Sunak's £15BN cash giveaway would lift UK consumer confidence over the coming weeks. Sunak announced that extra spending would be made available to households struggling under the weight of the rising inflationary pressures.

That said, the UK-EU impasse over the Northern Ireland protocol held back traders from placing fresh bullish bets around sterling. The British government's legislation that would effectively override parts of a Brexit deal has raised fears about a trade war in the middle of the cost-of-living crisis. Furthermore, a jumbo rate hike by the BoE is expected to take its toll on the UK economy, which might further cap the GBP/USD pair.

Investors might also prefer to wait on the sidelines ahead of important US macro data scheduled at the start of a new month. This week's US economic docket highlights the release of the ISM Manufacturing PMI on Wednesday, the ADP report on Thursday and the closely watched monthly jobs report (NFP) on Friday. This, along with the broader market risk sentiment, will influence the USD and provide a fresh directional impetus to the GBP/USD pair.

Technical outlook

From a technical perspective, acceptance above the 1.2600 mark and a subsequent move beyond the 38.2% Fibonacci retracement level of the 1.3090-1.2156 steep decline favours bullish traders. Some follow-through buying beyond Friday's swing high, around the 1.2665 region, will reaffirm the positive bias and pave the way for additional gains. The GBP/USD pair might then accelerate the momentum towards the 1.2700 round figure en-route the 61.8% Fibo. level, around the 1.2730 region.

On the flip side, any meaningful pullback now seems to find decent support and remains limited near the 1.2600-1.2590 region. Sustaiend weakness below might prompt aggressive technical selling and expose the 1.2500 psychological mark. The latter coincides with the 38.2% Fibo. level, which if broken would shift the bias back in favour of bearish traders. The next relevant support is pegged near the 1.2445 region before the GBP/USD pair eventually drops to the 1.2400 mark and the 1.2375 region, or the 23.6% Fibo. level.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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