GBP/USD Forecast: 1.2200 proves to be a tough resistance to crack

GBP/USD opened with a bullish gap and touched its highest level in five weeks at 1.2230 before retreating below 1.2200. The broad-based US Dollar weakness, however, helps the pair keep its footing as investors reassess the possibility of the US Federal Reserve leaving its policy rate unchanged at the upcoming meeting.

Risk flows dominated the markets in the early Asian session as markets reacted to news that UBS Group AG has agreed to buy Credit Suisse Group AG. More importantly, the Fed reinstated daily swaps to the Bank of Canada (BoC), the Bank of Japan (BoJ), the Swiss National Bank (SNB) and the European Central Bank (ECB) to provide additional liquidity if needed.

The positive impact of these developments on market sentiment remained short-lived. The sharp decline in the US Treasury bond yields suggest that investors are re-pricing the Fed's policy outlook. According to the CME Group FedWatch Tool, the probability of a 25 basis points Fed rate hike on Wednesday declined below 50%.

Reflecting the risk-averse atmosphere, the UK's FTSE 100 Index is down more than 1% at the beginning of the session and the US stock index futures are losing between 0.4% and 0.8%. 

Nevertheless, the USD seems to have lost its appeal as a safe haven in the current environment. As investors grow increasingly concerned about a deep global financial crisis, they refrain from betting on an aggressive Fed policy tightening, causing the USD to weaken. 

In the absence of high-impact data releases, US T-bond yields' action should continue to drive the USD's valuation in the second half of the day.

GBP/USD Technical Analysis

At the time of press, GBP/USD was trading within a few pips of 1.2200 (psychological level, static level). If the pair stabilizes above that level and starts using it as support, it could target 1.2240 (static level) and 1.2270 (February 14 high). 

On the downside, 1.2160 (ascending trend line) aligns as initial support before 1.2120 (20-period Simple Moving Average (SMA)) and 1.2100 (psychological level, static level).