GBP/USD Price Forecast: Seems vulnerable below 100-day SMA amid firmer USD

The GBP/USD pair meets with a fresh supply and slides below mid-1.3400s, back closer to the overnight swing low during the early part of the European session on Tuesday. The US Dollar (USD) attracts fresh buyers following the previous day's pullback from the vicinity of the late September high and turns out to be a key factor exerting downward pressure on the currency pair. The USD strength could be attributed to a broadly weaker Japanese Yen (JPY) and the Euro, which continue to be weighed down by domestic political uncertainties.

An unexpected result from Japan’s leadership contest sets the country on course for more expansionary fiscal policies. The expectations forced investors to temper their bets for an immediate interest rate hike by the Bank of Japan (BoJ), and turned out to be a key factor undermining demand for the JPY. Meanwhile, the surprise resignation of France’s new Prime Minister Sebastien Lecornu, amid a backlash from allies and adversaries over his freshly-appointed cabinet, dents sentiment surrounding the shared currency and benefits the Greenback.

Any meaningful USD appreciation, however, seems elusive in the wake of concerns that a prolonged US government shutdown could potentially disrupt economic activity. In fact, the US federal government remained shuttered for the sixth day on Monday, with the Senate struggling to reach consensus on a Republican-backed spending bill amid calls for the continuation of healthcare subsidies for millions of Americans. US President Donald Trump said he was open to working with the Democrats on healthcare, but only if the government was allowed to reopen.

Furthermore, dovish Federal Reserve (Fed) expectations might keep a lid on the USD. According to the CME FedWatch tool, the possibility of a 25-basis-point interest rate cut by the US Federal Reserve in October and December stands at around 95% and 84%, respectively. In contrast, money markets are betting the Bank of England (BoE) will keep interest rates on hold at 4% for the rest of this year as signs of faster inflation and a more resilient economy reduce the case for more easing. This, in turn, could act as a tailwind for the GBP/USD pair and limit losses.

Meanwhile, important US macro releases scheduled at the beginning of a new month, including the closely-watched Nonfarm Payrolls (NFP) report, have been delayed on the back of the US government closure. This, in turn, leaves the USD at the mercy of speeches from influential FOMC members. Apart from this, the FOMC Minutes, due on Wednesday, and Fed Chair Jerome Powell's appearance on Thursday, will be looked for more cues about interest rate cuts. This, in turn, will play a key role in driving the USD and providing a fresh impetus to the GBP/USD pair.

GBP/USD daily chart

Technical Outlook

The recent range-bound price action witnessed over the past week or so constitutes the formation of a rectangle chart pattern and points to indecision among traders over the next leg of a directional move for the GBP/USD pair. The lower boundary of the said range, around the 1.3420-1.3415 region, could protect the immediate downside ahead of the 1.3400 mark. Given that oscillators on the daily chart have just started gaining negative traction, a convincing break below the latter could expose the 1.3325 region, or a nearly two-month low touched in September. Some follow-through selling, leading to a subsequent weakness below the 1.3300 round figure, will be seen as a fresh trigger for bearish traders. This, in turn, will set the stage for the resumption of the recent corrective decline from the 1.3725 region, or the highest level since early July, touched last month.

On the flip side, the 1.3480-1.3485 zone, or the trading range hurdle, might keep a lid on any attempted recovery. This is closely followed by the 1.3500 psychological mark, or the 100-day Simple Moving Average (SMA), which, if cleared decisively, could trigger a short-covering rally and lift the GBP/USD pair to an intermediate hurdle near the 1.3565 zone en route to the 1.3600 round figure. The momentum could extend further towards the 1.3650 region before spot prices reclaim the 1.3700 mark and aim towards retesting the September swing high, around the 1.3725 area.