The technical aspect of the situation shows that the GBP/USD pair broke below the crucial 200-day Simple Moving Average (SMA) overnight, which could be a new signal for traders who are bearish. The daily chart also indicates that the oscillators are currently in the negative territory and far from reaching the oversold region. This implies that the GBP/USD pair is most likely to decline further.

Nonetheless, there was some buying on Friday, and it would be wise to wait for the acceptance below the 1.2400 mark before taking any position for further losses. If the spot prices fall below 1.2400, then it could accelerate towards the May monthly swing low at around 1.2310-1.2300 before reaching the next support region at 1.2280-1.2275.

Near the mid-1.2400s, there is likely to be resistance preventing any further upward movement. However, if this resistance is cleared, there may be a short-covering rally causing the GBP/USD pair to reach the psychological mark of 1.2500. Although the momentum of recovery could increase, it may quickly fizzle out near the weekly high of around 1.2545-1.2550. This high point should be considered a crucial point above which spot prices could rise to the 1.2600 mark on the way to the 100-day SMA, which is currently located near the mid-1.2600s.

If there is some follow-through buying, it could indicate that the two-month-old downtrend from the 1.3140 level, which is the highest level since April 2022, has come to an end. This could pave the way for a meaningful near-term appreciation move.

The final day of the week sees the GBP/USD pair making some gains, reversing some of the losses experienced the previous day when it dipped below 1.2400 for the first time since June 7. During the early European session, spot prices remained steady with slight gains supported by a weakening US Dollar (USD). The People’s Bank of China (PBoC) made its second Reserve Ratio Requirements cut this year, reducing it by 25 bps for local lenders.

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The move is expected to increase liquidity which could support growth in the second-largest economy globally. In addition, China’s Industrial Production and Retail Sales figures for August were better than expected. The combination of these factors increases investors’ confidence and prompts some profit-taking around the safe-haven Greenback.

After reaching a six-month high, the US dollar has seen a decline, but it’s expected to be limited because many believe the Federal Reserve will maintain its hawkish stance. The US central bank is expected to keep things the same in September, but positive US macro data could lead to a 25 basis point increase by the end of the year.

According to the US Census Bureau, Retail Sales rose by 0.6% in August, which was better than the expected 0.2% increase and the previous month’s 0.5% reading, indicating that despite rising interest rates, consumer spending is holding steady. The number of US Initial Jobless Claims rose from 217,000 to 220,000 during the second week of September, which was less than expected.

The US Bureau of Labor Statistics recently released the US Producer Price Index (PPI) which showed an increase to 0.7% in August, and the yearly rate rose to 1.6%. These figures exceeded predictions of 1.2% and 0.8% in July.

The US CPI report, which was released on Wednesday, also suggested that inflation is still present and that the Fed may need to tighten policies further. As a result, the USD bulls are favored, and the GBP/USD pair will likely not see any significant gains since the BoE Governor Andrew Bailey stated that the bank is close to ending its run of interest rate increases.

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GBP/USD Price Chart – Source: Tradingview
GBP/USD Price Chart – Source: Tradingview

In addition, Wednesday’s data revealed that the UK economy contracted by 0.5% in July, which is the fastest rate of decline in seven months, causing concerns about a possible recession. This, combined with indications that the UK labor market is cooling, puts pressure on the Bank of England to halt its cycle of interest rate hikes. As a result, there is a preference for GBP/USD bears, and any upward movement may still be viewed as an opportunity to sell.

Traders are now waiting for the BoE survey on Consumer Inflation Expectations to provide some stimulus. Later in the early North American session, the USD demand will be influenced by the US economic docket, which includes the Empire State Manufacturing Index and Prelim Michigan Consumer Sentiment Index, producing short-term trading opportunities. Despite this, spot prices are still expected to record losses for the second consecutive week.

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