GBP/USD Forecast: Pound looks to stretch higher above 1.2250

GBP/USD has preserved its bullish momentum and climbed above 1.2200 after having gained more than 150 pips last week. The pair remains on track to test 1.2250 and a four-hour close above that level could open the door for additional gains.

Despite the hot inflation data from the US on Friday, the CME Group FedWatch Tool shows that markets are pricing in a 30% probability of a 75 basis points (bps) Fed rate hike in September. On the other hand, the market positioning shows that the Bank of England (BoE) is now widely expected to raise its key rate by 50 bps on Thursday. Hawkish BOE bets and the Fed's cautious stance seem to be helping GBP/USD edge higher but it's too early to say that the policy gap has started to narrow. 

Earlier in the day, the data from the UK showed that the S&P Global Manufacturing PMI fell to 52.1 in July (final) from 52.8 in June. Commenting on the survey's findings, "with the Bank of England implementing further interest rate hikes to combat inflation, the outlook is beset with downside risks," said Rob Dobson, Director at S&P Global Market Intelligence. "With this in mind, the continued low degree of optimism among manufacturers is of little surprise."

The US economic docket will feature the ISM Manufacturing PMI data for July. The market consensus points to a decline in headline PMI to 52 from 53 in June. Investors will pay close attention to the Prices Paid and Employment components as well. In case the odds of a 75 bps Fed hike in September continue to decline on soft inflation and employment figures in the survey, GBP/USD could extend its recovery and vice versa.

GBP/USD Technical Analysis

GBP/USD closes in on 1.2250 (static level, July 29 high). With a four-hour close above that level, the pair could target 1.2300 (psychological level) and 1.2320 (the beginning point of the latest downtrend). On the other hand, supports are located at 1.2200 (psychological level, 1.2150 (20-period SMA on the four-hour chart) and 1.2125 (Fibonacci 61.8% retracement of the latest downtrend).

In the meantime, the Relative Strength Index (RSI) indicator on the four-hour chart stays below 70, suggesting that the pair has more room on the upside before turning technically overbought.