GBP/USD Forecast: Pound needs to clear 1.2250 to stretch recovery
- GBP/USD has stabilized above 1.2200 in the early European session.
- The pair needs to clear the 1.2250 hurdle to extend its recovery.
- Wall Street's main indexes remain on track to open sharply higher.
GBP/USD has gone into a consolidation phase slightly above 1.2200 early Friday with the improving market mood keeping the dollar's gains in check. The pair, however, faces stiff resistance at 1.2250 and it might find it difficult to gather bullish momentum in case that level stays intact.
The disappointing data releases from the UK and Brexit jitters weighed on the British pound on Thursday. On the other hand, the risk-averse market environment and hawkish Fed commentary provided a boost to the greenback, causing the pair to slump to its weakest level in two years at 1.2165.
Despite the positive shift witnessed in risk perception early Friday, the pound could struggle to attract investors while facing Brexit-related downside risks.
British foreign secretary, Liz Truss, has reportedly warned European Commission vice-president Maros Sefcovic, saying that they wouldn't have any other choice than to alter the Northern Ireland Protocol if the EU failed to show the "requisite flexibility" in negotiations. Earlier in the week, Sefcovic has reiterated that the renegotiation of the Northern Ireland protocol was not an option.
Ahead of the weekend, the University of Michigan's preliminary Consumer Sentiment Index for May will be featured in the US economic docket. If the upbeat market mood remains intact after this data, the US Dollar Index, which climbed to its highest level in nearly two decades at 104.92 on Thursday, could extend its downward correction and help GBP/USD edge higher.
GBP/USD Technical Analysis
The Relative Strength Index (RSI) indicator on the four-hour chart is moving sideways after having recovered above 30 earlier in the day, suggesting that GBP/USD is struggling to gather recovery momentum.
Additionally, the pair stays below the descending trend line coming from May 5, which forms the first resistance at 1.2250. The 20-period SMA is reinforcing that level as well. In case the pair rises above that hurdle and starts using it as support, it could target 1.2300 (psychological level, static level) and 1.2350 (static level, 50-period SMA).
On the downside, a four-hour close below 1.2200 (psychological level, static level) could attract sellers and open the door for another leg lower toward 1.2150 (static level from May 2020) and 1.2100 (May 15, 2020, low, 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.
