GBP/USD Outlook: Any meaningful recovery seems elusive; US PCE inflation data in focus

• GBP/USD dived to a fresh 22-month low on Thursday amid an extension of the strong USD bullish run.
• Aggressive Fed rate hike bets, the deteriorating global economic outlook continued boosting the buck.
• Diminishing odds for more BoE rate hikes weighed on the GBP and contributed to the heavy selling.
• The risk-on impulse acted as a headwind for the safe-haven buck and extended support to the major.

The GBP/USD pair witnessed heavy selling for the sixth successive day and dived to its lowest level since July 2020 on Thursday amid the relentless US dollar buying. The prospects for rapid interest rate hikes in the US, along with the deteriorating global economic outlook, pushed the USD to a five-year high. Investors seem convinced that the Fed would adopt a more aggressive policy response to combat stubbornly high inflation and have been pricing in a 50 bps rate hike at the upcoming meeting on May 3-4. The bets were reaffirmed by hawkish remarks from influential FOMC members last week, including Fed Chair Jerome Powell. The US central bank is also expected to continue tightening its monetary policy when it meets again in June and July, and ultimately lift rates to around 3.0% by the end of the year.

Investors also seem worried about a brewing energy crisis in Europe, which could impact the economic growth in the region. The concerns resurfaced after Russia announced a plan to halt gas flows to Poland and Bulgaria on Wednesday amid a standoff over fuel payments from “unfriendly” buyers in rubles. Moreover, the latest COVID-19 outbreak and prolonged lockdowns in China fuel fear about stalling global growth. This was another factor that boosted the greenback's reserve currency status. On the economic data front, the Advance US GDP report showed that the economy unexpectedly contracted by 1.4% during the first quarter. The disappointment, however, was largely offset by a sharp rise in the GDP Price Index, which accelerated to 8% in Q1 and reinforced hawkish Fed expectations.

The British pound was further weighed down by diminishing odds for aggressive Bank of England rate hikes amid signs that the UK economy is under stress from the soaring cost of living. Weak UK Retail Sales data released last week highlighted that high inflation might have started taking its toll on consumption. The combination of factors continued exerting downward pressure on the major, taking along some short-term trading stops near the key 1.2500 psychological mark. That said, the risk-on impulse in the equity markets acted as a headwind for the safe-haven buck and assisted spot prices in finding some support ahead of the 1.2400 mark. The pair finally settled around 40 pips off the daily low and gained some positive traction during the Asian session on Friday, though any meaningful recovery remains elusive.

There isn't any major market-moving economic data due for release from the UK, leaving the pair at the mercy of the USD price dynamics. Later during the early North American session, traders will take cues from the US economic docket, featuring the release of the Core PCE Price Index - the Fed's preferred inflation gauge. This, along with the broader market risk sentiment, will influence the USD price dynamics and produce short-term trading opportunities around the pair on the last day of the week.

Technical outlook

From a technical perspective, extremely oversold conditions on short-term charts were a key factor that prompted traders to lighten their bearish bets. The pair was last seen hovering around the 1.2500 mark, or the 23.6% Fibonacci retracement level of the recent slump witnessed over the past two weeks or so. This is closely followed by the 50-hour SMA, around the 1.2515 region, above which a bout of short-covering could lift spot prices to the 38.2% Fibo. level, around the 1.2570 area. Some follow-through buying, leading to a subsequent strength beyond the 1.2600 mark, will suggest that the pair might have formed a near-term bottom and pave the way for additional gains. The momentum could then get extended towards the next relevant resistance near the 1.2670 area, or the 50% Fibo. level.

On the flip side, the 1.2450 area protects the immediate downside ahead of the overnight swing low, around the 1.2410 region. The latter should act as a pivotal point, which, if broken decisively, will be seen as a fresh trigger for bearish traders. The pair would then accelerate the fall towards intermediate support near the 1.2345 region en route to the 1.2300 mark before eventually dropping to June 2020 low, around mid-1.2200s.