GBP/USD Forecast: Pound finds its footing on improving sentiment, stays fragile

GBP/USD seems to have stabilized around 1.3500 early Wednesday.
Improving risk mood is helping the British pound hold its ground so far.
Markets eye UK politics, FOMC’s January policy announcements.
GBP/USD has snapped a three-day losing streak on Tuesday and closed modestly higher near 1.3500, around which it continues to move sideways early Wednesday. The slight improvement witnessed in risk mood seems to be allowing the British pound to find some demand but the pair remains at the mercy of the dollar’s market valuation.

The US Dollar Index, which tracks the dollar’s performance against a basket of six major currencies, stays relatively quiet around 96.00 as investors gear up for the US Federal Reserve’s policy announcements.

The Fed is expected to signal a 25 basis points rate hike in March amid rising price pressures but market participants will want to know more about the possible timing of balance sheet reduction.

If FOMC Chairman Jerome Powell notes that they could start shrinking the balance sheet in the second half of the year instead of “toward the end of the year” this could have a bullish impact on the dollar and weigh on GBP/USD. On the other hand, Powell might adopt a cautious tone on policy tightening due to heightened fears about a global economic slowdown and cause the dollar to face renewed selling pressure. In that case, GBP/USD should extend its rebound, at least in the near term.

Meanwhile, senior civil servant Sue Gray’s report on British Prime Minister Boris Johnson’s lockdown parties is yet to come to light. On a concerning note, Scotland Yard has announced that they have launched a formal criminal investigation into eight events, during which lockdown rules were violated.

GBP/USD Technical Analysis
Although GBP/USD managed to rebound above the 200-period SMA on the four-hour chart, it’s too early to say that the pair has gone into a recovery phase with the Relative Strength Index (RSI) indicator staying below 50.

On the downside, 1.3460 (200-period SMA, Fibonacci 50% of the latest uptrend) aligns as first support ahead of 1.3410 (Fibonacci 61.8% retracement). Resistances are located at 1.3530 (Fibonacci 38.2% retracement) and 1.3580 (50-period SMA, 100-period SMA).