GBP/USD Price Forecast: Bulls turn cautious as UK political chaos counter USD weakness

The GBP/USD pair meets with some supply on Tuesday and erodes a part of the previous day's strong gains to the 1.3700 mark due to UK-specific concerns. Against the backdrop of the Bank of England's (BoE) dovish tilt, UK political turmoil turns out to be a key factor behind the British Pound's (GBP) relative underperformance. This keeps a lid on the currency pair's sharp recovery from the 1.3500 psychological mark, or a two-week low, touched last Friday.

As was widely expected, the BoE decided to leave interest rates unchanged at the end of the February meeting last Thursday, though the 5-4 MPC vote split was a lot more dovish than expected. Adding to this, the central bank signaled a future rate cut if inflation continued to slow. Moreover, BoE Governor Andrew Bailey told reporters during the press conference that inflation is set to reach the target level sooner than expected. Investors were quick to react and are now pricing in a 50 basis points (bps) BoE rate cut this year, which acts as a headwind for the GBP.

Meanwhile, concerns around UK Prime Minister Keir Starmer's leadership intensified after his chief aide, Morgan McSweeney, resigned over the appointment of the US ambassador with close ties to the convicted child sex offender Jeffrey Epstein. Adding to this, the leader of the Scottish Labour Party called for Starmer's resignation, adding a layer of uncertainty and weighing on the GBP. Market concerns, however, eased after members of the top leadership team publicly backed the Prime Minister. This, along with a bearish US Dollar (USD), could support the GBP/USD pair.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, languishes near a one-week low amid bets that the US Federal Reserve (Fed) will lower borrowing costs two more times this year. Apart from this, concerns about the US central bank's independence keep the USD bulls on the defensive. Apart from this, the prevalent risk-on environment, bolstered by signs of easing tensions in the Middle East, undermines the buck's safe-haven status. This, in turn, could limit deeper losses for the GBP/USD pair and warrants some caution for bearish traders.

Market participants now look to the release of the US monthly Retail Sales, which, along with Fedspeaks, could provide some impetus later during the North American session. The focus, however, will remain glued to the closely-watched US Nonfarm Payrolls (NFP) report on Wednesday and the latest US consumer inflation figures on Friday. These economic releases would offer more cues about the Fed's rate-cut path, which, in turn, will play a key role in influencing the USD price dynamics and determining the near-term trajectory for the GBP/USD pair.

GBP/USD 4-hour chart

Technical Analysis:

The GBP/USD pair showed some resilience below the 200-period Simple Moving Average (SMA) on the 4-hour chart earlier this month. The subsequent move up favors bullish traders. The Moving Average Convergence Divergence (MACD) histogram remains positive, indicating the MACD line above the Signal line, while its recent contraction hints at moderating momentum around the zero level. The Relative Strength Index (RSI) sits at 56 (neutral-bullish), reinforcing a modest upside bias.

Measured from the 1.3862 high to the 1.3510 low, the 50% retracement level at 1.3686 acts as nearby resistance, with the 61.8% Fibonacci retracement level at 1.3727 capping the next hurdle above. A clearance of 1.3686 would open the path toward 1.3727, whereas rejection at the first barrier could keep the pair consolidating beneath resistance.

(The technical analysis of this story was written with the help of an AI tool.)