– The prevalent modest USD selling bias continued lending support to GBP/USD on Tuesday.
– Brexit woes, expectations of a less hawkish BoE acted as a headwind for the British pound.
– The recent range-bound price action warrants caution before placing fresh directional bets.
The GBP/USD pair extended its sideways price move for the third successive day and remained confined in over a one-week-old trading range, below the 1.2300 round-figure mark. The recent sharp decline in commodity prices eased concerns about a further rise in inflationary pressures and forced investors to reassess the prospects for aggressive Fed rate hikes. This, along with a generally positive risk tone, undermined the safe-haven US dollar and extended some support to the major. The uptick, however, lacked bullish conviction amid the UK-EU impasse over the Northern Ireland Protocol of the Brexit agreement.
In the latest development, the UK House of Commons on Monday voted 295 to 221 in favour of a bill that would unilaterally overturn part of Britain’s divorce deal from the EU agreed in 2020. This comes despite warnings that it breaches international law and has raised the risk of fresh tensions with the EU, which has taken legal action. Apart from this, expectations that the Bank of England would opt for a more gradual approach towards raising interest rates amid growing recession fears further collaborate to capping the upside for the GBP/USD pair. This, in turn, warrants caution for aggressive bulls.
In the absence of any major market-moving economic releases from the UK, the incoming Brexit-related headlines would influence sentiment surrounding the British pound. Meanwhile, the US economic docket features the release of the Conference Board’s Consumer Confidence Index and Richmond Manufacturing Index later during the early North American session. Traders will further take cues from the broader market risk sentiment, which will drive the USD demand and provide some impetus to the GBP/USD pair. The focus, however, will remain on Fed Chair Jerome Powell and BoE Governor Andrew Bailey’s appearance at the ECB forum in Sintra, Portugal on Wednesday.
From a technical perspective, the recent range-bound price action constitutes the formation of a rectangle and points to indecision among traders. This makes it prudent to wait for a convincing break in either direction before traders start positioning for the next leg of a directional move. Sustained strength beyond the overnight swing high, around the 1.2330 region, would be seen as a fresh trigger for bulls and set the stage for additional gains. The GBP/USD pair might then surpass the 1.2360 intermediate hurdle and aim to conquer the 1.2400 round-figure mark. The momentum could further get extended and lift spot prices to the next relevant hurdle near the 1.2480 zone en-route the 1.2500 mark.
On the flip side, the 1.2240-1.2235 region now seems to protect the immediate downside ahead of the 1.2200 round figure and last week’s swing low, around the 1.2170-1.2160 zone. Some follow-through would make the GBP/USD pair vulnerable to weaken further below the 1.2100 mark and test the 1.2050 support zone before eventually dropping to the 1.2000 psychological mark. Bears might then aim to challenge the YTD low, around the 1.1935 region touched earlier this month.
Source: Haresh Menghani – FXStreet