GBP/USD Forecast: Pound Sterling hovers around 1.2700 without clear direction

GBP/USD edged lower at the beginning of the week before retracing its decline in the American session and closing the day virtually unchanged near 1.2700 on Monday. The pair moves up and down in a tight channel on Tuesday as trading conditions thin out due to the Independence Day holiday in the US.

The US Dollar (USD) weakened against its rivals on Monday after the ISM Manufacturing PMI report showed that economic activity in the manufacturing sector continued to contract in June. Additionally, the Employment Index fell below 50, pointing to a decrease in the sector's payrolls. Meanwhile, the inflation component, the Prices Paid Index, dropped to 41.8 from 44.2. Reflecting the negative impact of the PMI survey's on the USD's valuation, the US Dollar Index retreated to 103.00 from the session high it set near 103.30.

Nevertheless, investors could refrain from betting on additional Pound Sterling strength against the USD in the near term given the US economy's relatively better performance. 

Assessing Pound Sterling's outlook, "despite widespread expectations about the potential extent of Bank of England (BoE) rate hikes in the month ahead, in our view, GBP’s upside will be limited by concerns that tighter monetary policy also enhances growth risks," Rabobank analysts said in a report. "As demonstrated on several occasions last year, BoE rate hikes do not always lift the Pound."

GBP/USD Technical Analysis

GBP/USD was last seen trading near 1.2700, where the 100-period Simple Moving Average (SMA) on the 4-hour chart and the Fibonacci 23.6% retracement of the latest uptrend align. This level is likely to act as a pivot point in the near term.

In case 1.2700 is confirmed as resistance, GBP/USD could stretch lower toward 1.2650 (static level), 1.2630 (Fibonacci 38.2% retracement) and 1.2570 (Fibonacci 50% retracement).

On the upside, 1.2750 (static level) and 1.2800 (psychological level) could be set as bullish targets if GBP/USD stabilizes above 1.2700 and uses that level as support.