GBP/USD consolidates in a range below mid-1.2200s, seems vulnerable near multi-month low

• GBP/USD enters a bearish consolidation phase near a multi-month low touched last Friday.
• The USD continues to draw support from the Fed’s hawkish outlook and acts as a headwind.
• The BoE’s surprise pause is seen undermining the GBP and contributes to capping the upside.

The GBP/USD pair is seen oscillating in a narrow trading band during the Asian session on Monday and consolidating its recent losses to the lowest level since late March touched last week. Spot prices currently trade just below mid-1.2200s and seem vulnerable to prolonging a well-established downtrend from the 1.3140 area, or a 15-month peak touched on July 14.

The US Dollar (USD) stands tall near its highest level in more than six months and remains well supported by the Federal Reserve’s (Fed) hawkish stance, which, in turn, is seen as a key factor acting as a headwind for the GBP/USD pair. The Fed emphasized the need to keep interest rates higher for longer to push inflation back to the 2% target and lifted market bets for at least one more 25 bps lift-off by the year-end. Moreover, the so-called ‘dot-plot’ suggested just two rate cuts in 2024 as compared to four projected previously.

The outlook pushed the yield on the benchmark 10-year US government bond to its highest level since 2007, which, along with a generally weaker risk tone, continues to underpin the safe-haven Greenback. Apart from this, the Bank of England’s (BoE) surprise pause last Thursday contributes to the British Pound’s (GBP) relative underperformance and is seen as another factor weighing on the GBP/USD pair. In fact, the UK central bank ended a run of 14 straight interest rate hikes in the wake of the recent deceleration of inflation.

The aforementioned fundamental backdrop seems tilted firmly in favour of bullish traders and suggests that the path of least resistance for the GBP/USD pair is to the downside. That said, the Relative Strength Index (RSI) on the daily chart is flashing oversold conditions and warrants some caution. In the absence of any relevant macro releases, either from the UK or the US, this makes it prudent to wait for some near-term consolidation or a modest bounce before traders start positioning for any further depreciating move.

Technical levels to watch