• GBP/USD caught aggressive bids on Monday and was supported by a combination of factors.
  • UK government withdraws plan to scrap higher tax rate and provides a goodish lift to sterling.
  • Retreating US bond yields, the risk-on impulse weighs on the USD and contributes to the move.
  • Aggressive Fed rate hike bets help limit the USD losses and cap any further upside for the pair.

The GBP/USD pair prolonged its recent strong recovery move from an all-time low and continued scaling higher on the first day of a new week. The UK government took a U-turn and reversed a controversial tax cut plan announced in its mini-budget last week. Finance Minister Kwasi Kwarteng confirmed that his government will not scrap the country's top rate of income tax, which had triggered a crisis of confidence in the government. The announcement helped ease concerns about the UK's ballooning public debt and provided a goodish lift to the British pound. Apart from this, the emergence of fresh US dollar selling further contributed to the pair's overnight rally of around 250 pips.

The Bank of England issued a statement, reaffirming its willingness to buy up to £5 billion of long-dated gilts. This dragged the US Treasury bond yields further away from a multi-year top touched last week, which, in turn, weighed on the greenback. The intraday USD selling picked up pace after the Institute for Supply Management (ISM) survey showed that manufacturing activity grew at its slowest pace in nearly 2-1/2 years in September. In fact, the ISM Manufacturing PMI dropped to 50.9 from 52.8 in August. Furthermore, a measure of manufacturing employment contracted for the fourth time this year and a gauge of inflation at the factory gate decelerated for the sixth straight month.

Apart from this, the risk-on impulse - as depicted by the overnight rally in the US equity markets - further undermined the safe-haven buck. Nevertheless, the GBP/USD pair ended the day with strong gains and touches a nearly two-week high during the Asian session on Tuesday, though lacks follow-through. Growing acceptance that the US central bank will continue to raise interest rates at a faster pace to cool demand and tame inflation helps limit the downside for the USD. This, along with a bleak outlook for the UK economy, acts as a headwind for sterling and caps the major. Investors might also prefer to move to the sidelines ahead of the closely watched US monthly jobs data on Friday.

The popularly known NFP report will influence Fed rate hike expectations. This, in turn, will play a key role in determining the near-term trajectory for the greenback and the GBP/USD pair. In the meantime, traders on Tuesday will take cues from the US economic docket - featuring the release of JOLTS Job Openings and Factory Orders data. This, along with speeches by FOMC members, the US bond yields and the broader market risk sentiment, might drive the USD demand and provide some impetus to the major amid absent relevant market moving macro data from the UK.

Technical Outlook

From a technical perspective, bulls take a brief pause ahead of a descending trend-line hurdle extending from the August monthly high. The said barrier, currently around the 1.1400 mark, should act as a pivotal point, which if cleared decisively will set the stage for additional gains. The GBP/USD pair might then accelerate the momentum towards the 1.1460 intermediate resistance before aiming to reclaim the 1.1500 psychological mark. The recovery momentum could further get extended towards the 1.1600 round figure en route to the 50-day SMA, currently around the 1.1670 area.

On the flip side, the 1.1300 mark now seems to protect the immediate downside. Any subsequent fall is more likely to attract some dip-buying and remain limited near the 1.1250 support zone. A convincing break below will suggest that the corrective bounce has run out of steam and trigger some technical selling. The subsequent downfall has the potential to drag the GBP/USD pair back towards the 1.1200 round figure, below which bearish traders might aim to challenge the overnight swing low, around the 1.1085 region.

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