GBP/USD Forecast: Sellers look to take action as pound tests key support

GBP/USD has come under fresh bearish pressure and declined below 1.2200 in the early trading hours of the European session on Friday. The pair stays within a touching distance of the key support that aligns at 1.2175 and a failure of this level could bring in additional sellers.

The UK's Office for National Statistics (ONS) reported on Friday that the UK economy contracted by 0.1% on a quarterly basis in the second quarter but grew at an annualized rate of 2.9%. Both of these readings came in slightly better than market expectations but the British pound failed to attract investors. Additionally, the ONS announced that Industrial Production and Manufacturing Production declined by 0.9% and 1.6% on a monthly basis in June.

Although the market mood improves with the UK's FSTE 100 Index rising more than 0.5% after the opening bell, GBP/USD is having a tough time staging a recovery, reflecting the lack of interest surrounding the sterling. 

In the second half of the day, the University of Michigan will publish its flash Consumer Sentiment Survey for August. Rather than the headline Consumer Confidence Index, which is expected to improve modestly to 52.5 from 51.5 in July, market participants will keep a close eye on the long-run inflation expectations component.

In July's final reading, the 5-10 year inflation expectation stood at 2.9%. In case there is an uptick in that component, the greenback could outperform its rivals in the late American session and weigh on GBP/USD. On the other hand, a reading below 2.9% should cause investors to refrain from betting on a 75 basis points Fed rate hike in September and hurt the dollar ahead of the weekend. 

It's also worth noting that GBP/USD is still up around 100 pips this week and investors could look to book their profits if the US data fails to trigger a significant market reaction.

GBP/USD Technical Analysis

In case GBP/USD falls below 1.2175 (Fibonacci 23.6% retracement of the latest uptrend) and starts using that level as resistance, sellers could take action and trigger an extended downward correction toward 1.2150 (50-period SMA on the four-hour chart) and 1.2100 (Fibonacci 38.2% retracement, 100-period SMA).

On the upside, 1.2200 (psychological level) forms interim resistance before 1.2275 (the end-point of the uptrend) and 1.2300 (psychological level).