GBP/USD bulls could be about to take over from fresh bear cycle lows

• GBP/USD has been pressured to fresh cycle lows on US dollar strength. 
• The daily chart's M-formation is a reversion pattern that could see the price revert to the 50% mean reversion point near 1.1750.

GBP/USD bleeds out on Wednesday following a brief recovery vs. the nightly greenback. At the time of writing, GBP/USD is trading at 1.1609 and is recording a 0.4% loss on the day so far having fallen from a high of 1.1693 to a low of 1.1598. The pound has pierced the psychological 1.16 round level and is set for its worst month since late 2016 against the greenback as UK inflation is already at 10% and rising, with the Bank of England set to increase rates next month.

Record-high inflation in parts of the world is compounding recession fears stalking markets on Wednesday which is serving as a bullish plate for the US dollar and US Treasury yields. The two-year US Treasury yield, which is relatively more sensitive to the monetary policy outlook in the US, hit a 15-year high at 3.499% overnight but eased back to 3.446%. The 10-year Treasury yield, which hit a two-month high of 3.153% on Tuesday, stood at 3.123, easing back from 3.164%%.

The dollar index gained around 0.4% to 109.20, after starting the week by marking a two-decade high at 109.48. Nevertheless, the greenback remains on track for its third-straight monthly rise, with markets bracing for more oversized interest rate hikes from the US Federal Reserve. The index is on track for a rise of over 3% in August, and its highest end-of-month closing level since May 2002. Traders are now pricing in about a 70% chance of a 75 basis points Fed rate hike next month, according to data from Refinitiv.

The hawkish sentiment was underpinned this week by Fed officials reiterating their support for further rate hikes. New York Fed President John Williams told Wall the Wall Street Journal that inflation expectations in the US were well anchored but added that it would take a few years to bring inflation back to 2%. Richmond Federal Reserve Bank President Thomas Barkin said on Tuesday that the United States is facing "post-war-like" inflation. The comments followed the speech from Fed Chair Jerome Powell at the Jackson Hole central banking symposium in Wyoming late last week that shut left the door wide open for ongoing rate hikes into mid-2023, which prompted a wave of dollar strength. 

Global growth risks weigh on GBP

Meanwhile, economic news remained grim with overnight data showing economic activity in China. The nation has extended its decline this month after new COVID-19 infections, the worst heatwaves in decades and struggles in the property sector. China’s PMI survey data for August showed a contraction in factory activity. The data has leads some analysts to believe the world's second-largest economy will likely dip below 3.0% in the third quarter of this year. '' We have trimmed our 2022 GDP forecast to 3.0% from 4.0% as both domestic and external demand continues to weaken,'' analysts at ANZ Bank said. 

Such bearish sentiment is a risk for risk currencies, such as the pound as recessions loom. The BoE's recent forecast of recession underpins the vulnerability of the pound going forward. ''The warnings on growth over-rode any support for the currency that may otherwise have been derived from the Bank’s 50 bps rate hike, the largest incremental move in 27 years,'' analysts at Rabobank said., 

''The UK is facing months of astoundingly high inflation levels faced by a period of disinflation during potentially 5 quarters of negative GDP growth.''

''We see risk that cable could print as low at 1.14 on a 1 to 3-month view. This assumes a continued period of broad-based USD strength.''

GBP/USD technical analysis

The pound has extended the daily decline in a classic continuation from a 50% mean reversion of the prior bearish impulse on the hourly chart:

However, as illustrated on the chart above, we could be in for some consolidation between support and resistance and ultimately, this could lead to a bullish correction, as per the daily chart's analysis:

The daily chart's M-formation is overextended, but it is a reversion pattern that could see the price revert to the 50% mean reversion point near 1.1750 in due course.