GBP/USD Forecast: Pound looks vulnerable amid risk aversion

GBP/USD has continued to edge lower after Monday's decline pressured by renewed dollar strength and the risk-averse market environment. The technical outlook suggests that buyers remain on the sidelines and additional losses could be witnessed if the pair drops below 1.3600.

The sharp upsurge seen in the US Treasury bond yields ahead of next week's FOMC policy meeting is helping the greenback find demand early Tuesday. Markets are currently pricing in a more-than-90% chance of a 25 basis points rate hike in March, according to the CME Group's FedWatch Tool.

The benchmark 10-year US T-bond yield is staying in positive territory above 1.8% following a jump to its highest level in two years at 1.85%, earlier in the day.

Reflecting the souring market mood, the UK's FTSE 100 Index is down 0.9% so far on the day. Furthermore, US stocks futures indexes are losing between 0.55% and 1.5%. In case safe-haven flows continue to dominate the financial markets in the second half of the day, the risk-sensitive GBP could find it hard to stay resilient against the greenback.

Earlier in the day, the UK's Office for National Statistics reported that the ILO Unemployment Rate ticked down to 4.1% in November from 4.2%. Underlying details of the publication revealed that annual wage inflation, as measured by Average Earnings Including Bonuses, was 4.2% in November, down from 4.9% in October. Nevertheless, the market reaction to these figures was largely muted.

GBP/USD Technical Analysis

GBP/USD is trading below the ascending regression channel coming from December, pointing to a bearish shift in the near term. The lack of buyers' interest is also mirrored by the Relative Strength Index (RSI) on the four-hour chart, which fell below 40 for the first time in more than two months on Tuesday.

The Fibonacci 23.6% retracement level of the one-month uptrend forms strong support at 1.3600. In case a four-hour candle closes below that level, the pair could extend its slide to 1.3560 (100-period SMA) and 1.3530 (Fibonacci 38.2% retracement).

On the upside, the lower limit of the ascending channel and the 20-period SMA align as key resistance at 1.3680. If the pair manages to return within that channel, it could target 1.3700 (psychological level) and 1.3725 (middle line of the ascending channel).