GBP/USD Forecast: Bearish potential intact, further decline remains on the cards

• GBP/USD was seen oscillating in a narrow trading band through the early European session.
• Retreating US bond yields undermined the USD and extended some support to the major.
• Reduced BoE rate hike bets acted as a headwind amid persistent Brexit-related uncertainties.

The GBP/USD pair struggled to capitalize on the overnight bounce from the 1.3210-1.3200 support area and witnessed a subdued/range-bound price action through the early European session on Wednesday. A combination of factors continued acting as a headwind for the British pound and capped the upside for the major. However, a modest US dollar weakness held back bearish traders from placing aggressive bets and limited the downside, at least for the time being.

The discovery of the new Omicron variant of the coronavirus might force the Bank of England (BoE) to delay its decision to hike interest rates. In fact, a hawkish member of the BoE's Monetary Policy Committee, Michael Saunders, recently said that the new variant added uncertainty to the economic outlook and hinted to wait for more information before tightening monetary policy. This comes amid the UK-EU impasse over the Northern Ireland Protocol and undermined the sterling. In a statement issued on Tuesday, the DUP leader, Jeffrey Donaldson, said that the UK Government must show actions not words and remove the Irish Sea border. He also warned that political institutions in Northern Ireland can only retain support if swift and decisive action is taken by Boris Johnson and his Cabinet.

On the other hand, retreating US Treasury bond yields, along with a generally positive risk tone kept the USD bulls on the defensive and extended some support to the major. That said, rising geopolitical tensions kept a lid on any optimistic move in the financial markets. Relations between the US and Russia took a turn for the worse after US President Joe Biden threatened to impose strong economic and other measures on Russia if it invades Ukraine. Apart from this, the prospects for a faster policy tightening by the Fed continued lending support to the greenback.

Investors seem convinced that the US central bank would be forced to adopt a more aggressive policy response to contain stubbornly high inflation. Hence, the market focus will remain glued to the release of the US consumer inflation figures on Friday. The data would influence the Fed's decision to taper its stimulus at a faster pace and set the stage for an eventual interest rate hike. This, in turn, will influence the near-term USD price dynamics and provide a fresh directional impetus to the GBP/USD pair. Nevertheless, the bias still seems tilted firmly in favour of bearish traders and supports prospects for additional near-term losses.

Technical outlook

From a technical perspective, last week’s break below a short-term descending channel and the pair’s inability to gain any meaningful traction adds credence to the negative outlook. Hence, a subsequent slide back towards testing sub-1.3200 levels, or the YTD low set last week, remains a distinct possibility. Some follow-through selling should pave the way for a fall towards the next relevant support near the 1.3125 region en-route the 1.3100 mark and the 1.3050-45 region.

On the flip side, the overnight swing high, just ahead of the 1.3300 mark, now seems to act as immediate strong resistance. A sustained strength beyond should trigger a short-covering move and accelerate the recovery towards the 1.3340-50 supply zone. This is followed by resistance near the 1.3370 area and the 1.3400 level. The latter should act as a key barrier, which if cleared decisively will suggest that the pair has bottomed out in the near term and negate the bearish bias.