- GBP/USD has turned south, dropping below 1.2400 early Wednesday.
- A four-hour close under 1.2350 could bring in additional sellers.
- Risk mood is likely to continue to drive the pair's action in the near term.
GBP/USD has reversed its direction, declining below 1.2400 early Wednesday, after having managed to close in positive territory above this level on Tuesday. The technical outlook points to a bearish tilt in the short term and a break of the 1.2350 support could open the door for an extended slide.
The risk-positive market atmosphere made it difficult for the US Dollar (USD) to find demand in the first half of the day on Tuesday and helped GBP/USD stage a decisive rebound. In the late American session, however, markets turned cautious after the bill to suspend the debt ceiling only narrowly passed the House Rules Committee.
Early Wednesday, US stock index futures are down between 0.2% and 0.3%, suggesting that market participants are refraining from committing to a risk rally as the bill moves to a vote in the House. Several Republicans have spoken out against the debt-limit deal and investors are sceptical whether the bill could be approved quickly.
In case safe-haven flows dominate the financial markets in the second half of the day, GBP/USD is likely to have a difficult time retracing its daily decline. On the flip side, a positive shift in market mood could weigh on the USD and help the pair limit its losses.
GBP/USD technical analysis
The upper-limit of the broken descending channel aligns as key support level at 1.2350. If GBP/USD falls below that level and starts using it as resistance, it could face interim support at 1.2320 (Fibonacci 38.2% retracement level of the latest uptrend) before falling toward 1.2300 (psychological level, mid-point of the descending channel). In case 1.2300 fails, the next bearish target could be seen at 1.2260 (lower-limit of the descending channel).
The 1.2370 (20-period Simple Moving Average (SMA)) level aligns as immediate resistance before 1.2390/1.2400 (50-period SMA, psychological level). A four-hour close below the latter could attract buyers and pave the way for an extended upward correction toward 1.2450 (Fibonacci 23.6% retracement, 100-period SMA).
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