• GBP/USD faced rejection near the 1.4200 mark and turned lower for the second consecutive day.
  • A combination of factors should help limit the downside and warrant caution for bearish traders.

The GBP/USD pair extended its steady intraday descent through the early European session and fell to fresh daily lows, around the 1.4170-65 region in the last hour.

The pair struggled to capitalize on Friday’s goodish rebound of around 50 pips from the 1.4135 region and faced rejection near the 1.4200 mark on the first day of a new trading week. The GBP/USD pair has now drifted into the negative territory for the second consecutive session, though a combination of factors should help limit any meaningful slide, at least for the time being.

Despite stronger inflation data from the US, investors seem convinced that the Fed will retain its ultra-lose monetary policy for a longer period. Various FOMC officials have downplayed worries about runaway inflation and reiterated that any spike in prices would prove to be temporary. This might act as a headwind for the US dollar and extend some support to the GBP/USD pair.

On the other hand, the British pound might continue to benefit from the optimistic outlook for the UK economic recovery from the pandemic. Adding to this, the Bank of England policymaker Gertjan Vlieghe’s hawkish comments, saying that the central bank could raise rates well into next year, should further underpin the sterling and warrants some caution for bearish traders.

Moreover, relatively thin liquidity conditions – amid holiday in Britain and the United States – might further hold traders from placing aggressive bets. Hence, it will be prudent to wait for some strong follow-through buying before confirming that the GBP/USD pair has topped out in the near term and positioning for any meaningful corrective slide.

Technical levels to watch

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