GBP/USD Forecast: Pound needs to hold above 1.2160 to remain bullish

  • GBP/USD has lost its traction following Monday’s rally.
  • Souring market mood is not allowing the British pound to find demand.
  • Investors stay focused on headlines surrounding US-China relations.

After having climbed to a fresh five-week high near 1.2300 on Monday, GBP/USD has lost its traction and dropped to the 1.2200 area in the early European session on Tuesday. The negative shift witnessed in risk mood is making it difficult for the British pound to find demand but buyers could look to remain active as long as the 1.2160 support holds.

Investors seek refuge on Tuesday amid escalating US-China tensions. US House of Representatives Speaker Nancy Pelosi is reportedly on her way to Taiwan and China has voiced its opposition to this US action. “There will be serious consequences if she insists on making the visit,” Chinese foreign ministry spokesperson Zhao Lijian said and Xinhua news agency reported that China will take “resolute measures” if Pelosi goes ahead with the trip.

Although the UK’s FTSE 100 Index trades flat, US stock index futures are down between 0.5% and 0.8%, suggesting that Wall Street’s main indexes could start the day deep in negative territory following Monday’s choppy action.

In case safe-haven flows continue to dominate the markets, the dollar could gather strength and weigh on GBP/USD. It’s also worth noting that the benchmark 10-year US Treasury bond yield is down nearly 1% at 2.55%, limiting the greenback’s gains for the time being.

In the absence of high-tier macroeconomic data releases, the risk perception should continue to impact the market action. 

Chicago Fed President Charles Evans and St. Louis Fed President James Bullard are scheduled to speak later in the day. Their comments are unlikely to trigger a significant market reaction unless they influence the probability of a 75 basis points Fed rate hike in September, which currently stands at 18.5%. 

GBP/USD Technical Analysis

GBP/USD manages to hold above 1.2200 (psychological level, 20-period SMA on the four-hour chart). In case this level turns into resistance, additional losses toward 1.2160 (Fibonacci 23.6% retracement of the latest uptrend) could be witnessed. A violation of this support could be seen as a bearish development and open the door for an extended slide toward 1.2120, where the ascending trend line is located.

On the upside, 1.2250 (static level, July 29 high) aligns as interim resistance ahead of 1.2275 (the end-point of the uptrend) and 1.2300 (psychological level).

It’s worth noting the near-term bullish bias stays intact with the Relative Strength Index (RSI) indicator on the four-hour chart holding comfortably above 50.

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