GBP/USD Forecast: Downside appears limited as 1.3460 support holds

GBP/USD has managed to recover to 1.3500 following Monday's decline.
Technical outlook suggests that the pair could move sideways in the near term.
UK PM Johnson noted that no new measures are needed to fight Omicron.

Eren Sengezer FXStreet

GBP/USD has snapped a three-day winning streak on Monday and fallen to a daily low of 1.3430 before staging a rebound early Tuesday. The pair was last seen trading a little below 1.3500 and the near-term technical outlook suggests that it could have a difficult time making a decisive move in either direction.

The broad-based dollar strength weighed on GBP/USD on the first trading day of 2021. The risk-positive market environment provided a boost to US Treasury bond yields and helped the greenback find demand. The US Dollar Index, which gained more than 0.5% on Monday, is currently consolidating its gains near 96.30, limiting GBP/USD's rebound for the time being.

British Prime Minister Boris Johnson announced on Monday that no new measures were needed to battle the coronavirus Omicron variant. "Of course, we will keep all measures under review but the mixture of things that we are doing at the moment is I think the right one," said Johnson, providing support for the pound against its peers.

It is the dollar's valuation that is likely to impact GBP/USD's movements most in the short term. Later in the session, the ISM will release the US Manufacturing PMI data for December. If the report points to an ongoing expansion in the manufacturing sector's activity at a robust pace, risk flows could dominate the markets and allow the dollar to outperform its rivals on the back of rising yields.

GBP/USD Technical Analysis

Despite Monday's sharp decline, GBP/USD managed to hold above the 50-period SMA on the four-hour chart, which is currently acting as dynamic support at 1.3460. The Relative Strength Index (RSI) indicator on the same chart is moving sideways near 50, confirming the pair's indecisiveness.

On a negative note, GBP/USD seems to have broken below the ascending trend line coming from December 21 and buyers could remain on the sidelines as long as the pair stays below that line.

In case the pair drops below 1.3460 and starts using it as resistance, the next target on the downside is located at 1.3440 (static level) before 1.3400 (static level, psychological level).

Resistances are located at 1.3500 (psychological level, 20-period SMA), 1.3520 (static level) and 1.3550 (December 31 high).

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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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