GBP/USD Forecast: Pound Sterling faces strong resistance at 1.2100

Following Tuesday's sharp decline, GBP/USD has regained its traction and climbed above 1.2050 early Wednesday, erasing all of the previous day's losses in the process. In case risk flows continue to dominate the financial markets, the pair could test the key resistance area that seems to have formed at 1.2100.

Despite falling US Treasury bond yields and the positive shift witnessed in risk sentiment, the US Dollar outperformed its rivals on Tuesday. In the European morning on Wednesday, market correlations seem to be normalizing with the US Dollar facing selling renewed sellingpressure amid rising global stocks. At the time of press, US stock index futures were up between 0.4% and 1% on the day.

The ISM Manufacturing PMI will be featured in the US economic docket. Analsysts forecast the headline PMI to retreat to 48.5 in December from 49 in November and see the Prices Paid component to edge lower to 42.5 from 43. If the report shows that input inflation in the manufacturing sector continued to decline while the overall activity contracted for the second straight month, the US Dollar could continue to weaken against its major rivals. On the other hand, an unexpected rebound above 50 in the headline PMI and an increase in the inflation component should have the opposite effect on the currency's valuation and weigh on GBP/USD.

US Dec ISM Manufacturing PMI Preview: Encouraging sub-indices could temporarily boost US Dollar.

Later in the American session, the Federal Reserve will publish the minutes of its December policy meeting, at which the US central bank decided to raise the policy rate by 50 basis points. 

The CME Group FedWatch Tool shows that markets are pricing in a 69.3% probability of a 25 basis points Fed hike in February, suggesting that the US Dollar could suffer additional losses if the statement ramps up this probability. Wall Street's reaction to the FOMC Minutes could provide a directional clue for the US Dollar. A rally in major US equity indices is likely to reflect that markets are not convinced that the Fed will refrain from shifting the policy later in the year and vice versa.

GBP/USD Technical Analysis

GBP/USD climbed above 1.2040, where the 50-period and 20-period Simple Moving Averags (SMA) on the four-hour chart are located. Additionally, the Relative Strength Index (RSI) indicator on the same chart recovered to 50, pointing to a renewed buyers interest.

As long as the pair holds above 1.2040, it could target 1.2100 (Fibonacci 23.6% retracemnet of the latest uptrend, 200-period SMA, 100-period SMA). A four-hour close above that level could attract bulls and open the door for an extended rally toward 1.2200 (psychological level, static level).

In case the pair retreats below 1.2040 and starts using that level as resistance, it could continune to push lower 1.2000 (psychological level, static level) and 1.1940 (Fibonacci 38.2% retracement).