GBP/USD Technical Analysis: Weakness of the Bullish Retracement

• The GBP/USD exchange rate revealed its New Year gains last week, and it will be fortunate if it is able to avoid a further breakout below the 1.20 psychological support in the coming days after an unfavorable expansion of the expected Fed interest rate differential.
• The GBP/USD price is settling around 1.2025 at the time of writing.
• Overall, the dollar was broadly bought at the expense of the pound and most other G20 currencies after the US consumer price index fell less than expected for January, and producer price data indicated that cost pressures in supply chains remained stubbornly high in the new year.

Inflation figures and other data out of the US helped push expectations about a possible peak in the US interest rate to new highs, leaving derivatives market prices on Friday with the September 2023 peak in the range of 5.25% to 5.5%. Overall the changing outlook is pushing the spread between the Fed's expected interest rates and the Bank of England's (BoE) back near its widest level since before the 2008 financial crisis, which should weigh heavily around the ankles of the GBPUSD rate.

Joseph Capurso, the analyst at Commonwealth Bank of Australia, says that the “GBP/USD could consolidate this week after stepping down last week. The UK's February PMIs are the main local events (Tuesday)." He added that “We expect PMIs to remain below the 50 level, which indicates a contraction in the British economy. However, a weak British economy is not news and modest readings below 50 are unlikely to see a significant reaction from GBPUSD.”

UK retail sales came in better than expected for January on Friday while other data released on Tuesday suggested that employment rose further towards the end of the year, although none of these data points were able to offset the headwinds caused by Weak interest rate forecasts for the Bank of England. It comes after UK inflation fell by more than expected for January last Wednesday and the BoE's chief economist suggested that the March increase in the bank rate could no longer be taken for granted; With a smaller 0.25% increase than should be expected.

The advantage of the dollar's wide interest rate is a burden that could weigh on the pound if Katherine Mann, the BoE's more hawkish policymaker, also indicated an emerging preference for smaller interest rate steps in the coming months when addressing the Resolution Foundation last Thursday. Aside from the rhetoric of the British central bank officials, PMIs are the most important event of the week for the pound-dollar rate ahead of Friday's reading of the US core PCE price index for January; The Fed's preferred measure and the most popular inflation watch in the United States.

GBP/USD Forecast:

The general trend of the GBP/USD currency pair is still bearish, and as I mentioned before, stability around and below the 1.2000 psychological support level will remain supportive of the bears’ control and warns of an upcoming strong downward move. The closest support levels for the currency pair are currently 1.1975 and 1.1880, respectively, and the last level is sufficient to push Technical indicators heading toward oversold levels, according to the performance on the daily chart below. On the other hand, over the same time period, breaching the 1.2220  resistance will give the bulls some momentum to advance. The reaction to this week's important economic data, along with investor sentiment in the markets, will guide the currency pair during this week's trading.