GBP/USD Forecast: Path of least resistance remains down, 200-day SMA holds the key

The GBP/USD pair meets with a fresh supply on Tuesday and slips back below the 1.2500 psychological mark during the early European session, reversing a major part of the previous day's modest gains. Following the overnight sharp fall, the US Dollar (USD) attracts some dip-buying and turns out to be a key factor exerting some pressure on the major. In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, now seems to have stalled its retracement slide from a six-month peak touched last Friday and remains supported by the prospects for further policy tightening by the Federal Reserve (Fed).

The US central bank is widely expected to pause its rate-hiking cycle in September, though the markets are still pricing in the possibility of one more 25 bps lift-off by the end of this year. The bets were reaffirmed by the upbeat US macro data released last week, which pointed to a resilient economy. Moreover, the fact that inflation is not cooling fast enough should allow the Fed to keep interest rates higher for longer. The hawkish outlook, meanwhile, remains supportive of elevated US Treasury bond yields, which, along with the cautious market mood, helps revive demand for the safe-haven buck and weighs on the GBP/USD pair.

Against the backdrop of concerns about the worsening economic conditions in China, worries about headwinds stemming from rapidly rising borrowing costs temper investors' appetite for riskier assets. The USD bulls, however, might refrain from placing aggressive bets and prefer to wait for the release of the latest US consumer inflation figures, due for release on Wednesday. The crucial US CPI report will provide fresh cues about the Fed's future rate hike path. This, in turn, will play a key role in influencing the near-term USD price dynamics and help investors determine the next leg of a directional move for the GBP/USD pair.

In the meantime, the British Pound could draw some support from the overnight hawkish remarks by Bank of England (BoE) policymaker Catherine Mann,  saying that it was too soon to stop raising interest rates. Mann added that it was better for the central bank to err on the side of raising them too high rather than stopping prematurely. This comes after BoE Governor Andrew Bailey warned last week that borrowing costs might still have further to rise because of stubbornly high inflation, which might further contribute to limiting the downside for the GBP/USD pair. Traders, meanwhile, seem unimpressed by the mixed UK jobs data.

The UK Office for National Statistics (ONS) reported that Average Earnings Including Bonuses rose 8.5% during the three months to July and unemployment ticked higher to 4.3% from 4.2%. Additional details of the report revealed that there were 0.9K people claiming unemployment-related benefits in August, down sharply from the 29K in the previous month, overshadowing a larger-than-anticipated employment loss of 207K in July. The lack of any follow-through buying, meanwhile, suggests that the GBP/USD pair's recent downfall from the YTD peak, witnessed over the past two months or so, is still far from being over.

Technical Outlook

From a technical perspective, any subsequent slide is more likely to find some support near the 1.2445 area, or the multi-month low touched last week, ahead of the 200-day Simple Moving Average (SMA), currently around the 1.2425 region. Some follow-through selling, leading to a break below the 1.2400 mark will be seen as a fresh trigger for bearish traders and make the GBP/USD pair vulnerable. The downward might then drag spot prices to the May monthly swing low, around the 1.2310-1.2300 area, en route to the 1.2280-1.2275 support zone.

On the flip side, the overnight swing high, around mid-1.2500s, might now cap any attempted recovery. A sustained strength beyond could push the GBP/USD pair to the 1.2600 round-figure mark. Any further move up, however, might still be seen as a selling opportunity and remain capped near the 100-day SMA, currently pegged near mid-1.2600s. The latter should act as a pivotal point, which if cleared decisively will suggest that a nearly two-month-old downtrend has run its course and shift the near-term bias in favour of bullish traders.