GBP/USD remains on the defensive below 1.1500 mark ahead of UK PM results

The GBP/USD pair kicks off the new week on a weaker note and hits a fresh low since March 2020 during the early European session. Spot prices, however, manage to rebound a few pips, though remain on the defensive below the 1.1500 psychological mark.

The British pound continues to be weighed down by a bleak outlook for the UK economy and uncertainty over the economic policies of the next British Prime Minister. The recent surge in energy prices has raised concerns over the UK cost of living crisis and intensified fears of a deeper economic downturn. The worries were further fueled by the latest forecast from the British Chambers of Commerce (BCC), which expects the UK economy to record three consecutive quarters of contraction this year.

Apart from this, the underlying strong bullish sentiment surrounding the US dollar keeps exerting some downward pressure on the GBP/USD pair. As investors look past Friday's mixed US jobs report, firming expectations that the Fed will stick to its aggressive policy tightening path to tame inflation lifts the USD to a fresh two-decade high. In fact, the markets are currently pricing in a greater chance of a supersized 75 bps rate hike move at the upcoming FOMC policy meeting on September 20-21.

This, in turn, remains supportive of elevated US Treasury bond yields and continues to underpin the greenback. That said, signs of stability in the financial markets seem to act as a headwind for the safe-haven buck amid relatively thin trading volumes on the back of the Labor Day holiday in the US. Traders also seem reluctant to place aggressive bets and prefer to wait on the sidelines ahead of the announcement of the next UK Prime Minister later this Monday at 11:30 am GMT.

From a technical perspective, the pair is in a long-term downtrend and this provides a negative backdrop, and a headwind to any recovery attempts. Cable has reached close to some key target zones in the 1.14s which suggest selling pressure may ease somewhat but does not yet signal a reversal. One of these is the target for the bear flag pattern which formed in late-to-mid August. Another is the baseline of a descending channel, in the 1.1420s, which began at the start of a year. Although price did not quite reach that level on its last sell-off it came close and if it revists the level it may draw day traders and bulls to go long the expected bounce. Another is that the daily RSI(14) indicator has entered the oversold zone and this may further suggesting a reduction in bearish momentum. It's too early to expect a rebound yet – something which would require the RSI to exit oversold – but it will be a disincentive for investors to go short, further reducing selling pressure.   

Technical levels to watch