- GBP/USD is still “selling the bounce” after hitting 22-month lows.
- Risk aversion and BoE recession projections keep any rebound in GBP/USD limited.
- Confirmation of a bearish flag on the 4-hour chart points to more GBP/GBP pain.
GBP/USD is bouncing back above 1.2300, quickly recovering from fresh 22-month lows hit at 1.2276 in the last hour.
The US dollar index DXY remains firm and advanced to the highest levels since December 2002, fueling renewed GBP/USD weakness.
Sentiment around the British pound remains affected after the BoE projected a recession for the UK economy in the fourth quarter of 2022 while raising the key rate by 25 basis points to 1% on Super Thursday.
On the other hand, despite a contraction in US fourth quarter GDP, Fed Chairman Jerome Powell remains confident in the economy and labor market, suggesting a 50 basis point rate hike in the next two meetings.
The divergence between the Fed and the BoE on monetary policy and the economic outlook will likely keep GBP/USD’s downside potential intact. The focus now turns to the US NFP data and talks from Fed and BoE officials for further trade stimulus in the pair.
Looking at the technical charts, Thursday’s drop followed by today’s Asian session consolidation has formed a bearish flag pattern on the 4-hour chart.
The pair broke the rising trend line support at 1.2340 on a 4-hour close, validating the bear flag.
Therefore, the doors are open for a further drop to fresh 22-month lows below 1.2300.
At time of writing, the pair is attempting a minor retracement, although bear flag support now lies at 1.2340 acting as a powerful barrier to the upside.
The recovery momentum will gain strength only after a sustained move above this latest level, with an eye on pattern resistance at 1.2388.
If the bulls retake that level, then it will lead to an invalidation of the pattern, triggering a further rally towards the psychological barrier at 1.2450.
If the selling momentum resumes, the bears will test the 22-month lows once again, opening the doors towards 1.2250.
GBP/USD 4 hour chart
GBP/USD additional technical levels
Source: Fx Street
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