GBP/USD Forecast: Pound needs sentiment boost to extend rebound

GBP/USD has managed to edge higher early Wednesday.
UK defence ministry says there is no evidence of Russian withdrawal.
The pair could target 1.3600 in case risk flows dominate the markets.

Eren Sengezer FXStreet

GBP/USD has managed to stretch higher early Wednesday and climbed above 1.3550 after posting small gains on Tuesday. The pair, however, could find it difficult to gather bullish momentum unless market sentiment continues to improve.

Reports suggesting that Russian troops were heading back to barracks after ending military drills on Tuesday allowed risk flows to dominate the markets. The greenback struggled to find demand as a safe haven and GBP/USD gained traction during the European trading hours. In the second half of the day, the risk rally cooled off as US President Joe Biden said Russia could still invade Ukraine.

Early Wednesday, the UK defence ministry noted that they had not seen any evidence of a withdrawal of the Russian military. On a similar note, European Commission President Ursula von der Leyen said that NATO had not seen a sign of a reduction in Russian troops. Reflecting the cautious market mood, the UK's FTSE 100 Index is trading flat on the day.

Meanwhile, the data published by the UK's Office for National Statistics (ONS) revealed on Wednesday that the annual Consumer Price Index (CPI) edged higher to 5.5% in January from 5.4% in December. With investors awaiting geopolitical developments, this data failed to trigger a noticeable market reaction.

Later in the day, January Retail Sales data will be featured in the US economic docket. Moreover, the US Federal Reserve will publish the minutes of the January policy meeting. Market participants will look for fresh clues on policymakers' views on the timing of the balance sheet reduction and the possibility of a 50 basis points rate hike in March. Nevertheless, the risk perception is likely to remain the primary market driver. GBP/USD could lose its traction if market participants start to seek refuge.

GBP/USD Technical Analysis

GBP/USD is trading above the 1.3550/1.3560 resistance area that is reinforced by the 200-period SMA on the four-hour chart and the Fibonacci 23.6% retracement of the latest uptrend. Additionally, the Relative Strength Index (RSI) indicator is advancing toward 60, suggesting that the bullish momentum is gathering strength.

On the upside, 1.3600 (psychological level) aligns as the next target before 1.3620 (static level). Supports are located at 1.3550/1.3560 (200-period SMA, Fibonacci 23.6% retracement), 1.3520 (Fibonacci 38.2% retracement, 100-period SMA) and 1.3500 (psychological level).

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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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