GBP/USD seems vulnerable below 1.2100, multi-month low on sustained USD buying

• GBP/USD remains on the defensive near a multi-month trough touched this Tuesday.
• A combination of factors lifts the USD to a fresh YTD top and weighed on the major.
• The BoE's surprise pause continues to weigh on the GBP and favours bearish traders.

The GBP/USD pair is seen oscillating in a narrow trading band below the 1.2100 mark and consolidating its recent losses to the lowest level since March 16 touched during the Asian session this Tuesday. Extremely oversold conditions on the daily chart hold back bearish traders from placing fresh bets, though the fundamental backdrop suggests that the path of least resistance for spot prices is to the downside.

The British Pound (GBP) continues with its relative underperformance in the wake of the Bank of England's (BoE) surprise move to pause its rat-hiking cycle in September. This was the first time since December 2021 that the BoE did not raise interest rates. Adding to this, the UK central bank also lowered its forecast for economic growth in the July-September period to just 0.1% from the previous projection of 0.4% and provided little hints of its intention to raise rates any further. This, along with the underlying strong bullish sentiment surrounding the US Dollar (USD), acts as a headwind for the GBP/USD pair.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, climbs to its highest level since November 2022 and remains well supported by growing acceptance that the Federal Reserve (Fed) will stick to its hawkish stance. In fact, the markets have been pricing in the possibility of at least one more rate hike by the year-end. Adding to this, Cleveland Fed President Loretta Meste said that the US central bank will need to keep rates restrictive to get inflation back to the 2% target. This, in turn, pushes the US Treasury bond yields to a fresh multi-decade high and continues to underpin the USD.

Apart from the Fed's higher-for-longer interest rate narrative, a generally weaker risk tone is seen as another factor benefitting the Greenback's relative safe-haven status and weighing on the GBP/USD pair. The initial market reaction to the mixed Chinese PMIs and the passage of a US stopgap funding bill over the weekend turned out to be short-lived amid worries about economic headwinds stemming from rapidly rising borrowing costs. This continues to drive investors towards traditional safe-haven assets and favours the USD bulls, which, in turn, validates the near-term negative outlook for the major.

Moving ahead, there isn't any relevant market-moving economic data due for release from the UK, leaving the GBP/USD pair at the mercy of the USD price dynamics. Later during the early North American session, traders will take cues from the US JOLTS Job Openings data. This, along with the US bond yields and the broader risk sentiment, will influence the USD price dynamics and provide some impetus. The focus, however, will remain on the US NFP report, due on Friday.

Technical levels to watch