GBP/USD bounces weakly from monthly low and shows some resistance below 1.2000

• GBP/USD quickly reverses an intraday drop to levels below 1.2000, or a new monthly low.
• Expectations of a gradual BoE rate hike and recession fears are acting as a headwind for sterling.
• The dollar remains near the monthly maximum and helps to further limit the pair.

The GBP/USD pair staged a nice rebound from the new monthly low reached this Thursday at 1.1994. The recovery momentum brings prices closer to the daily high around 1.2060 during the first half of the European session, although it lacks bullish conviction.

The US dollar is holding on to its modest intraday gains, a key factor acting as a headwind for the GBP/USD pair. Despite signs of easing in US inflation, market participants seem convinced that the Fed will maintain its tightening policy. Furthermore, the minutes of the FOMC meeting on July 26 and 27 indicated that the US central bank would not consider reducing interest rate hikes until inflation subsided substantially. Aggressive Fed expectations continue to support elevated US Treasury yields and continue to support the greenback.

Apart from this, the prevailing risk aversion environment offers additional support to the dollar, which is a safe haven. Growing concerns about a slowing global economy continue to weigh on investor sentiment, reflected in the generally weaker tone of equity markets. Sterling, meanwhile, could struggle to gain significant momentum amid speculation that an economic downturn could force the UK central bank to take a gradual approach to raising interest rates. This was reinforced by the previous day’s sharp drop despite the UK CPI report being stronger than expected.

The price chart also paints a bearish picture for the pound, with the 50-day SMA around 1.2095 successfully capping gains for most of the summer. A bearish formation of death crosses is completing on the weekly chart. The 50-week SMA has slipped below the 200-weekly moving average and a reversal bar at the end of the week will fix and confirm the crossover. This suggests more bearish pressure on the horizon from the bears and the possibility of more losses.

Thus, the fundamental and technical backgrounds seem to lean strongly in favor of the bears and support the prospects for further losses. That said, the repeated failures to find acceptance below the 1.2000 signal and the appearance of some buying on dips warrants caution. Therefore, it would be prudent to wait for sustained weakness below that zone before positioning for a further downside move. Market participants now await the US economic docket, with the release of the Philadelphia Fed manufacturing index, the usual weekly jobless claims and existing home sales data.

GBP/USD Technical Levels