GBP/USD Forecast: Now seems vulnerable to test sub-1.2200 levels

The GBP/USD pair failed to capitalize on its attempted recovery move on Monday, instead witnessed a dramatic intraday turnaround and dived to one-month lows. The early uptick was exclusively sponsored by the emergence of some renewed US dollar selling bias amid a modest recovery in the global equity markets. However, the ever-increasing number of coronavirus cases served as a warning that the road to recovery will be much slower than expected. This, in turn, extended some support to the greenback's perceived safe-haven status and kept a lid on any strong gains for the major.

The British pound was further pressured by concerns about how Britain’s government will pay for its planned infrastructure program. The worries surfaced after the UK Prime Minister Boris Johnson promised to double public investments. This comes on the back of persistent Brexit-related uncertainties, which further took its toll on the sterling and contributed to the pair's sharp intraday fall. The pair tumbled around 140 pips from daily swing highs and took along some short-term trading stops near the 1.2300 round-figure mark.

The bearish pressure eased near mid-1.2200s and the pair settled around 50 pips off session lows, though lacked any strong follow-through, rather met with some fresh supply during the Asian session on Tuesday. The pair remained depressed following the release of downbeat UK macro data, which showed that the economy contracted by 2.2% during the first quarter of 2020 as compared to -2.0% estimated earlier. On an annualized basis, the UK economy contracted by 1.7% during the three months to March, again falling short of market expectations of -1.6%. Adding to this, the UK Q1 Current Account deficit jumped to £21.10 billion as against £15.00 billion expected and £9.22 billion previous (revised higher from £5.6 billion reported earlier).

Moving ahead, market participants now look forward to the US economic docket – featuring the release of Chicago PMI and the Conference Board's Consumer Confidence Index – for some impetus. Later during the US session, the Fed Chair Jerome Powell, along with Treasury Secretary Steven Mnuchin, will testify before the House Financial Services Committee. This might influence the USD price dynamics and produce some meaningful trading opportunities.

Short-term technical outlook

From a technical perspective, the overnight sharp downfall indicated that the near-term bearish bias is still far from being over and supports prospects for a further downfall. This coupled with the formation of a descending trend-channel further points to a well-established short-term bearish trend. Hence, some follow-through weakness towards testing the trend-channel support, levels below the 1.2200 mark, remains a distinct possibility.

On the flip side, any meaningful recovery attempt beyond the 1.2300 round-figure mark now seems to confront a stiff resistance and remain capped near the 1.2355-60 region. The mentioned hurdle marks the 61.8% Fibonacci level of the 102076-1.2813 positive move and should now act as a key pivotal point for short-term traders. A sustained strength beyond the said barrier might assist the pair to aim back towards reclaiming the 1.2400 mark.