GBP/USD Threatened After Disappointing UK Data

The GBP/USD pair has suffered heavy losses at the beginning of the week. The pair closes in on 1.2200 after disappointing UK data. The US dollar is likely to preserve its strength amid hawkish Fed bets, risk aversion.

The GBP/USD pair has extended its slide in the early European session on Monday after the disappointing data from the UK caused the British pound to come under renewed selling pressure. Although the near-term technical outlook shows that the pair is oversold, a recovery in the current market environment seems unlikely.

The UK’s Office for National Statistics (ONS) reported on Monday that the economy contracted by 0.3% on a monthly basis in April, compared to analysts’ estimate for an expansion of 0.2%. Underlying details of the publication revealed that the three main sectors of the economy, services, production and construction, all contributed negatively to the Gross Domestic Product (GDP). Additionally, the ONS announced that Manufacturing Production declined by 1% in the same period.

Investors seem to be moving away from the British pound after these figures, which might force the Bank of England to reconsider its rate outlook ahead of Thursday’s policy announcements.

On the other hand, Friday’s hot inflation data from the US seems to have ramped up hawkish Fed bets. According to the CME Group’s FedWatch Tool, there is now a more-than-50% probability of the Fed hiking its policy rate by a total of 125 basis points in the next two meetings.

The risk-averse market environment, as reflected by a 1.5% drop in the UK’s FTSE 100 Index, makes it difficult for the pair to stage a rebound. With US stock index futures losing between 2% and 3.3% in the European session, it would be fair to expect safe-haven flows to dominate the financial markets in the second half of the day.

Technically; during the sharp decline after the UK data, GBP/USD has pierced through several support levels. The Relative Strength Index (RSI) indicator on the four-hour chart stays deep within the oversold territory below 30.

If the pair continues technical correction, 1.2270 (static level, former support) aligns as first resistance ahead of 1.2300 (psychological level). With a daily close above 1.2300, sellers could book their profits and move to the sidelines, allowing the pair to extend its recovery toward 1.2350 (static level).

On the downside, 1.2200 (psychological level) could be seen as the next bearish target ahead of 1.2155 (two-year low set on May 13).