GBP/USD sees strong downward move amid USD strength, markets eager for US labor data

• The pair slipped below the 20-day SMA towards 1.2320.
• The US Dollar staged a notable recovery propelled by increasing yield rates and a risk-off market mood.
• December's labor market figures are poised to influence the bets on the next Fed moves.
• If the US economy continues to show resilience, the pair is poised for further downside.

In Tuesday's session, GBP/USD witnessed a substantial dip, trading at around 1.2620, with significant downward momentum primarily triggered by USD strength. A risk-off market environment ahead of key labor market figures from the US contributed to investors seeking refuge in the US Dollar. In addition, the negative outlook on the British economy adds to the selling pressure.

Lately, the UK economy seems shaky, with signs of easing food price inflation while expectations of Bank of England's rate cuts remain elevated for 2024. Moreover, data on the robustness of the US economy suggest that the US dollar may appreciate further against the British pound, making the exchange rate prospects for GBP/USD somewhat bearish in the short term. However, the outcome of the Nonfarm Payrrols, Average Hourly Earnings, and Unemployment rate figures from December will set the pace for the pair for the short term, as weak readings may intensify the dovish bets on the Federal Reserve (Fed).

To add to that, US bond yields are on an upward trajectory, making the Greenback gain interest. The 2-year rate is 4.32%, while the 5-year yield is 3.91% while the 10-year rate stands at 3.94%. The ascent in these yields provides a boost to the USD volume.

GBP/USD technical outlook

The daily Relative Strength Index (RSI), despite bearing a negative tilt, is still rooted in the positive territory, hinting at a remaining demand for the pair. However, the momentum seems to favor sellers as the Moving Average Convergence Divergence (MACD) decreases its green bars, suggesting a dwindling buying interest.

Meanwhile, the Simple Moving Averages (SMAs) paint a slightly different picture. The pair continues to trade under the influence of the bulls in the broader time horizon, attributed to its position above both the 100-day and 200-day SMAs, but the pair has slipped below the 20-day SMA, signaling a possible shift towards a neutral to bearish bias in the shorter term.

In summary, there is a sense of indecision in the pair's short-term technical outlook as buyers appear to sustain control over the wider framework, but selling momentum gradually strengthens.

GBP/USD daily chart