GBP/USD Faces Potential Correction Amidst Quiet Market Condition

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he GBP/USD pair continues to trade within a bearish channel on the H4 timeframe. In the recent session, there was a pullback towards the 50% Fibonacci level, coinciding with a previous resistance area and the dynamic trendline of the bearish channel. Based on this technical analysis, we are currently seeking a new short setup.

From a fundamental perspective, the GBP/USD pair started the week with limited activity due to the Spring Bank Holiday in the UK and the Memorial Day holiday in the US, resulting in thin trading volumes. The near-term technical outlook indicates that buyers are staying on the sidelines, but a potential extended correction may occur once Pound Sterling stabilizes above the 1.2360 level.

Last week, hawkish expectations regarding the Federal Reserve (Fed) provided support to the US Dollar (USD), causing the GBP/USD pair to decline by nearly 100 pips.

Before the weekend, the US Bureau of Economic Analysis released data showing that the Core Personal Consumption Expenditures (PCE) Price Index, which is the Fed's preferred measure of inflation, slightly increased to 4.7% on a yearly basis in April, surpassing market expectations of 4.6%. Additional information from the report indicated healthy consumer activity, with a 0.8% monthly rise in Personal Spending.

According to the CME Group FedWatch Tool, the probability of the Fed keeping its policy rate unchanged in June decreased to below 40% from nearly 75% a week ago.

Meanwhile, US President Joe Biden and Republican House Speaker Kevin McCarthy reached an agreement to suspend the debt limit on Sunday. If this development leads to a risk-positive sentiment when bond markets and US stock index futures resume trading early Tuesday, the USD may face difficulty in finding demand, potentially allowing the GBP/USD pair to gain momentum.

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