GBP/USD remains on the defensive, hovers around 1.2200 mark ahead of BoE’s Bailey

The GBP/USD pair retreats from a one-month high touched earlier this Monday and remains on the defensive through the early North American session, though lacks follow-through. The pair is currently placed around the 1.2200 mark and is weighed down by a modest US Dollar strength.

In the absence of any relevant economic data, a softer risk tone, amid worries about a deeper global economic downturn, revives demand for the safe-haven Greenback. In fact, the USD Index, which measures the Greenback's performance against a basket of currencies, rebounds from a seven-month low and exerts some downward pressure on the GBP/USD pair.

The British Pound is further undermined by a bleak outlook for the UK economy, which has been fueling speculations that the Bank of England (BoE) could be nearing the end of its rate-hiking cycle. That said, expectations for a less aggressive policy tightening by the Fed are also capping the attempted USD recovery and act as a tailwind for the GBP/USD pair.

Investors now seem convinced that the Fed will soften its hawkish stance and have been pricing in a smaller 25 bps rate hike in February amid signs of easing inflationary pressures. The bets were lifted by the latest US CPI report released last week, which showed that consumer prices fell in December for the first time in more than 2-1/2 years.

Furthermore, a holiday in the US, in observance of Martin Luther King Jr. Day, is holding back the USD bulls from placing aggressive bets and lending support to the GBP/USD pair. That said, BoE Governor Andrew Bailey's speech might influence the British Pound and provide some impetus ahead of the monthly UK employment details on Tuesday.

The pair is at a key technical inflection point, with the exchange rate resting just below the trend line for the short term rally up from the January 6 lows. If GBP/USD manages to end the day below the trend line it will indicate a probable break and more downside to come, probably to support at the key January 12 low at 1.2090. A close back above the trendline - which practicaly means above about 1.2225 - however, would negate the bearish thesis and suggest a possible continuation of the dominant uptrend higher, to the 1.2285 highs. The 200-week Simple Moving Average (SMA) is depressing price further from where it sits providing dynamic resistance at 1.2215. Much probably depends on Baily's speech at 15:00 GMT. 

Technical levels to watch