GBP/USD trades in the 1.22s after penetrating major trendline, traders now await US NFPs

The GBP/USD pair extends the previous day's rejection slide from the 1.2400 mark and continues losing ground for the second successive day on Friday. Spot prices drop to a nearly three-week low during the first half of the European session, with bears looking to build on the negative momentum further below the 1.2200 round-figure mark. The pair has broken below a major multi-month trendline drawn from the September 2022 lows suggesting the possibility of a dramatic shift in trend and more downside on the horizon. 

The British Pound is undermined by a dovish assessment of the Bank of England's (BoE) policy outlook, which, along with a modest US Dollar strength, exerts pressure on the GBP/USD pair. Although, the BoE raised the policy rate by another 50 bps and noted that further tightening would be required if there were to be evidence of more persistent price pressures, the UK economy is reeling from a series of shocks and remains vulnerable to a recession.

In its policy statment the BoE removed the phrase that they would "respond forcefully, as necessary" (to inflation) leading to expectations rate hikes might slow. Furthermore, BoE Governor Andrew Bailey said that inflation will continue to fall this year and more rapidly during the second half of 2023. This, in turn, fuels speculations that the current rate-hiking cycle might be nearing the end and continues to weigh on the Sterling.

The US Dollar, on the other hand, is seen building on the overnight goodish rebound from a nine-month low amid some repositioning trade ahead of the closely-watched US NFP report. The US Weekly Initial Jobless Claims data released on Thursday pointed to the underlying strength in the labor market. This, in turn, boosted expectations for a strong Nonfarm Payroll report, due later during the early North American session, and forced investors to re-evaluate their expectations for future rate hikes by the Fed.

The prevalent cautious market mood is seen as another factor benefiting the safe-haven Greenback. and contributing to the offered tone surrounding the GBP/USD pair. Moreover, the technical setup with the penetration of the key trendline and today's open below it, supporting prospects for a further near-term depreciating move – although one fly in the ointment for bears remains the 50-day SMA at 1.2190, which provides a last line of defense against a sell-off.

The recent repeated failures near the 1.2445 region constitute the formation of bearish multiple top formation on the daily chart. The subsequent break below the 1.2200 mark adds credence to the negative outlook and suggests that the path of least resistance for the GBP/USD pair is to the downside. Hence, any attempted recovery move might now be seen as a selling opportunity and runs the risk of fizzling out rather quickly. Spot prices seem poised to weaken further towards the 1.2130-1.2125 intermediate support en route to the 1.2100 round figure.

Technical levels to watch