GBP/USD Forecast: Difficult to bet on a steady pound recovery

GBP/USD has recovered toward 1.2000 in the early European morning following Tuesday's steep drop but failed to preserve its momentum. The political drama in the UK and growing recession fears should continue to weigh on the pair in the near term.

Gas prices in the UK hit three-month highs on Tuesday with the ongoing strike at Norway's state-backed Equinor threatening further cuts to UK's gas imports. The British economy relies heavily on energy imports and it becomes more and more likely for the economy to tip into recession before the end of the year, causing the sterling to lose interest.

Meanwhile, several Tory MPs, most notably Finance Minister Rishi Sunak and Health Secretary Sajid Javid, have quit British Prime Minister Boris Johnson's government. Although Johnson can technically hold his position for another year after having survived the no-confidence vote, he is now facing heavy pressure. Although it's difficult to figure out the implications of these political developments on the economic outlook, investors are likely to stay away from the pound amid heightened uncertainty.

Earlier in the day, Bank of England (BOE) Chief Economist Huw Pill noted that he would be willing to back more rapid rate hikes than the string of 25 basis point increases imposed so far, if data showed it necessary. This hawkish comment, however, failed to help the pair hold its ground. 

Later in the day, the ISM Services PMI will be looked upon for fresh impetus. The Federal Reserve will release the minutes of the FOMC's June monetary policy meeting as well. Meanwhile, US stock index futures are down between 0.15% and 0.2% on the day. The risk sentiment has been driving the dollar's valuation and another bout of flight to safety could boost the greenback in the second half of the day and vice versa.

GBP/USD Technical Analysis

Static support seems to have formed at 1.1930 for GBP/USD. With a four-hour close below that level, 1.1900 (static level, psychological level) aligns as next support before the pair could target 1.1800 (psychologically level).

On the upside, first resistance is located at 1.2000 (psychological level, static level). The pair needs to flip that level into support in order to extend its correction toward 1.2050 (static level, 20-period SMA on the four-hour chart) and 1.2100 (psychological level).