GBP/USD Outlook: Acceptance above 38.2% Fibo. sets the stage for a move beyond 1.2600

The GBP/USD pair built on last week's strong recovery move and scaled higher through the Asian session on Monday. The momentum pushed spot prices to a two-and-half-week high and was sponsored by the emergence of fresh US dollar selling. Given that the markets already seem to have fully priced in at least a 50 bps Fed rate hike move over the next two meetings, signs of stability in the financial markets undermined the safe-haven buck. The British pound was further supported by the Bank of England (BoE) Chief Economist Huw Pill's remarks on Friday, saying that they still have some way to go in policy tightening as MPC sees an upside skew in the risks around the inflation. That said, a combination of factors might hold back traders from placing aggressive bullish bets and keep a lid on any further gains for the major, at least for the time being.

Against the backdrop of a surprise economic contraction in March, the UK inflation data released last week fueled stagflation fears. Moreover, rising wages threaten to exacerbate inflationary pressures and hurt consumer spending. This, along with the Bank of England's gloomy economic outlook and Brexit jitters, should act as a headwind for sterling. In the latest Brexit-related development, the British government announced last Tuesday a bill that would effectively override parts of a Brexit deal. The European Commission had pledged to respond with all measures at its disposal if Britain moves ahead with a plan to rewrite the NI protocol. This could trigger a trade war in the middle of the cost-of-living crisis and further take its toll on the UK economy, warranting caution before positioning for any further gains for the GBP/USD pair.

Furthermore, expectations that the Fed would need to take more drastic action to bring inflation under control, along with the worsening global economic outlook, should limit the USD losses. Investors remain worried that a more aggressive move by major central banks, the Russia-Ukraine war and extended COVID-19 lockdowns in China to constrain inflation could pose challenges to the global economic growth. Apart from this, a goodish pickup in the US Treasury bond yields supports prospects for the emergence of some USD dip-buying. This, in turn, suggests that the pair's ongoing move up runs the risk of fizzling out rather quickly. In the absence of any major market-moving economic releases, either from the UK or the US, traders on Monday will take cues from the BoE Governor Andrew Bailey's speech later during the North American session.

Technical outlook

From a technical perspective, sustained strength beyond the 1.2500 psychological mark, which coincided with the 38.2% Fibonacci retracement level of the 1.3090-1.2156 decline, could be seen as a fresh trigger for bulls. Moreover, oscillators on the daily chart have recovered from the bearish territory and have been gaining positive traction on hourly charts. The set-up supports prospects for a move towards reclaiming the 1.2600 mark. The momentum could further get extended towards testing the next relevant hurdle near the 1.2625 region, nearing 50% Fibo. level. Some follow-through buying would suggest that the GBP/USD pair has already formed a near-term bottom and pave the way for a further near-term appreciating move.

On the flip side, the 38.2% Fibo. level resistance breakpoint, around the 1.2500 mark, now seems to act as immediate strong support. Any subsequent decline is likely to find decent support near the 1.2455-1.2450 region, below which the GBP/USD pair might accelerate the fall towards the 1.2400-1.2390 confluence. The latter comprises 100-period SMA on the 4-hour chart and the 23.6% Fibo. level. A convincing break below will shift the bias back in favour of bearish traders and make the pair vulnerable. The next relevant support is pegged near the 1.2330-1.2325 region ahead of the 1.2300 mark before the pair eventually drops to the 1.2235-1.2230 area.