GBP/USD Outlook: Bears look to seize control below 1.1200 amid UK political crisis

• GBP/USD languishes near the weekly low despite a modest intraday USD downtick.
• Aggressive Fed rate hike bets, elevated US bond yields should limit the USD decline.
• The UK political crisis undermines the British pound and further acts as a headwind.

The GBP/USD pair remains depressed for the third straight day on Thursday and drops to the lower end of its weekly trading range despite a modest US dollar downtick. That said, the UK political crisis acts as a headwind for the British pound and keeps spot prices below mid-1.1200s through the first half of the European session. After being forced to resign, UK Home Secretary Suella Braverman launched a stinging attack on Prime Minister Liz Truss. Moreover, reports indicate that lawmakers will try to oust the recently-elected British Prime Minister in the wake of the recent tax cut fiasco.

The latest development comes amid growing worries about a deeper economic downturn and might force the Bank of England to adopt a gradual approach towards raising interest rates despite high inflation. In fact, the official data released on Wednesday showed that the UK CPI shot to a fresh 40-year high in September, which might continue to undermine the British pound. The USD, on the other hand, remains well supported by expectations for more hawkish moves by the Fed. In fact, the CME's FedWatch tool indicates a nearly 100% chance of another supersized 75 bps rate hike in November.

The bets were reaffirmed by the recent hawkish remarks by several Fed officials, reiterating that the US central bank is committed to its aggressive fight against soaring prices. This, in turn, pushes the yield on the rate-sensitive 2-year US government bond to a new 15-year peak and the benchmark 10-year Treasury note to its highest level since the 2008 financial crisis. Apart from this, looming recession risks might continue to offer some support to the safe-haven buck. The fundamental backdrop favours bearish traders and suggests that the path of least resistance for the GBP/USD pair is to the downside.

There isn't any major market-moving data due for release from the UK on Thursday, while the US economic docket features the Philly Fed Manufacturing Index, Weekly Initial Jobless Claims and Existing Home Sales data. This, along with speeches by influential FOMC members and the US bond yields, will drive the USD demand and provide some impetus to the GBP/USD pair. Traders will further take cues from the broader market risk sentiment ahead of the UK monthly Retail Sales figures on Friday.

Technical Outlook

From a technical perspective, the GBP/USD pair has managed to defend the 200-hour SMA, though the lack of any meaningful buying favours bearish traders. Sustained weakness and acceptance below the 1.1200 mark will reaffirm the negative bias, which, in turn, will set the stage for deeper losses. Spot prices might then accelerate the fall towards the next relevant support near the mid-1.1100s. The downward trajectory could further get extended towards the 1.1100 mark en route to the 1.1055-1.1050 support zone and the 1.1000 psychological mark.

On the flip side, the daily swing high, around the 1.1240 area, now seems to act as an immediate resistance, which, if cleared, might trigger a short-covering bounce. Any subsequent move up, however, is likely to attract fresh sellers near the 1.1300 mark. This, in turn, should cap the upside near the 1.1335-1.1345 region. This is closely followed by the aforementioned trend-line resistance.