GBP/USD Forecast: Pound Sterling struggles to benefit from risk flows

GBP/USD has lost its traction and retreated below 1.2250 early Tuesday after having advanced toward 1.2300 on Monday. As markets remain split on the Bank of England's (BOE) next policy decision, the Pound Sterling could have a hard time capitalizing on risk flows.

The broad-based selling pressure surrounding the US Dollar provided a boost to GBP/USD on Monday. In the European morning on Tuesday, the US Dollar Index holds steady supported by recovering US Treasury bond yields. The CME Group FedWatch Tool shows that markets are pricing in a more than 80% probability that the US Federal Reserve (Fed) will raise its policy rate by 25 basis points (bps).

On the other hand, there is a nearly 50%, according to futures market positioning, that the BOE will leave its policy rate unchanged on Thursday. 

Hence, the possibility of a policy divergence between the Fed and the BOE might not allow GBP/USD to take advantage of the risk-positive market environment.

In the second half of the day, Existing Home Sales for February will be featured in the US economic docket. Investors, however, are likely to ignore this data. 

In case risk flows continue to dominate the markets in the American session with Wall Street's main indexes building on Monday's gains, the US Dollar could stay on the back foot and help the pair limit its losses even if it struggles to gather bullish momentum.

GBP/USD Technical Analysis

The lower limit of the ascending regression channel coming from early March forms strong support at 1.2200. If that level fails, additional losses toward 1.2150 (static level) and 1.2120 (50-period Simple Moving Average (SMA) on the four-hour chart) could be witnessed. 

1.2280 (mid-point of the ascending channel, psychological level) aligns as first resistance before 1.2300 (psychological level) and 1.2340 (upper limit of the ascending channel).