GBP/USD: Recovery remains capped just ahead of 1.3000

• Poor UK macro data, increased BOE rate cut calls dents the pound.
• The US dollar index looks to extend the bounce.
• Technical set up remains bearish ahead of US CPI data.

GBP/USD consolidates in a tight range just below the 1.30 handle, having failed several attempts to extend the recovery above the last so far this Tuesday.

The upside attempts in the cable remain capped, as the US dollar recovers some ground across the board. The greenback is seen benefiting from the gains in the US Treasury yields fueled by the optimism surrounding an imminent US-China phase one trade deal signing.

Meanwhile, the latest report citing that the USTR removed the currency manipulator label for China also collaborated with the risk-on market mood.  

From the GBP-side of the equation, despite the rebound from three-week lows of 1.2961, the British pound remains exposed to downside risks amid increased calls for a Bank of England (BOE) rate cut as early as this September.

Last week, the BOE Governor Carney said that there is room for 250 bps cut while over the weekend BOE policymaker Vlieghe noted that he would back for a reduction if economic data does not improve. 

Further, a string of downbeat UK fundamentals, including the monthly GDP contraction and a sharp fall in the industrial and manufacturing production data, backs the case for dovish BOE monetary policy stance going forward amid looming Hard Brexit risks.

Moreover, the technical set up has also turned in favor of the bears, as GBP/USD “now looks set to test the head-and-shoulders neckline support at 1.2960 with the 5- and 10-day averages flashing a bearish crossover and the 14-day relative strength index reporting bearish conditions with a below-50 print. A close below that level would confirm a breakdown or a bearish reversal and create room for a slide to 1.2582 (Sept. 20 high)”, FXStreet’s Analyst, Omkar Godbole explains.

The focus now shifts towards the US inflation data due later in the NA session at 1330 GMT, in absence of any relevant data from UK docket this Tuesday. Also, the development surrounding the phase one trade deal will keep the markets busy.

GBP/USD Technical levels to consider