GBP/USD Analysis: Failure near ascending channel/200 DMA confluence warrants caution for bulls

• GBP/USD plummets over 175 pips intraday amid a dramatic USD recovery on Monday.
• China’s COVID-19 woes, hawkish remarks by Fed officials boost the safe-haven buck.
• Bets for less aggressive Fed rate hikes cap the USD and limit further losses for the pair.
• Traders now look to BoE Governor Bailey’s speech for some meaningful opportunities.

The GBP/USD pair witnessed heavy selling during the latter part of trading on Monday and tumbled over 175 pips from the daily swing high. The US Dollar stages a solid recovery from the very important 200-day SMA amid the global flight to safety and turned out to be a key factor exerting downward pressure on the major. The global risk sentiment took a hit in the wake of the worsening COVID-19 situation in China, which, in turn, boosted demand for the traditional safe-haven greenback. In fact, China reported another record high COVID-19 infections on Monday and the imposition of new restrictions prompted a wave of protests in several cities. This raised concerns about a further slowdown in economic activity and tempers investors’ appetite for riskier assets, which was evident from the overnight steep decline in the equity markets.

The intraday USD buying picked up pace in reaction to more hawkish remarks by a slew of influential FOMC members. St. Louis Fed President James Bullard noted that the target policy rate will need to stay above 5.00% for most of 2023 and into 2024 to be sufficiently restrictive to reduce inflation. Adding to this, New York Fed President John Williams said that there is still more work to do for the central bank to reach its goal of 2% inflation. Furthermore, Fed Vice Chair Lael Brainard said that the string of supply shocks is keeping inflation risks elevated. This led to a goodish rebound in the US Treasury bond yields and acted as a tailwind for the buck. That said, growing acceptance that the US central bank will slow the pace of its policy tightening kept a lid on the USD and helped limit the downside for the GBP/USD pair.

It is worth recalling the November FOMC meeting minutes released last week revealed that a substantial majority of policymakers judged that a slowing rate hike would soon be appropriate. Moreover, officials were largely satisfied that they could stop front-loading the rate increases and move in smaller steps, cementing bets for a 50 bps lift-off in December. This, in turn, acts as a headwind for the greenback. Apart from this, expectations that the Bank of England will continue to raise borrowing costs to tame inflation offer support to the British pound and assists the GBP/USD pair to regain positive traction during the Asian session on Tuesday. Traders now look to speeches by BoE MPC Member Catherine Mann and Governor Andrew Bailey for some impetus in the absence of any relevant macro data from the UK. Later during the early North American session, the Conference Board’s US Consumer Confidence Index might also contribute to producing short-term trading opportunities around the major.

Technical Outlook

From a technical perspective, last week’s failure near the 200-day SMA and the subsequent downfall could be seen as the first signs of bullish exhaustion. That said, the emergence of some dip-buying on Tuesday warrants some caution for aggressive bearish traders. Moreover, spot prices have been trending higher along an upward-sloping channel over the past two months or so. Hence, some follow-through selling below the overnight swing low, around the 1.1940 region, is needed to confirm a near-term top for the GBP/USD pair. The next relevant support is pegged near the 1.1900 round figure, below which the downfall could get extended to the 1.1825-1.1820 area en route to the 1.1800 mark and the 1.1775-1.1765 support zone.

On the flip side, momentum back above the 1.2025 region should allow bulls to aim back to conquer the 1.2100 mark. This is followed by the monthly high, around the 1.2150-1.2155 region touched last week, and the 1.2165 area (200 DMA). A sustained strength beyond has the potential to lift the GBP/USD pair further beyond the 1.2200 round figure, towards challenging the aforementioned trend-channel hurdle, currently around the 1.2240-1.2245 region. Some follow-through buying will mark a fresh breakout and set the stage for an extension of the short-term upward trajectory.