GBP/USD Outlook: Flag pattern favours bearish traders amid bets for bigger Fed rate hikes

• GBP/USD witnessed selling for the second straight day on Thursday amid modest USD strength.
• The Fed’s hawkish outlook, elevated US bond yields continued acting as a tailwind for the buck.
• The risk-on impulse capped the USD and assisted the pair to find support ahead of mid-1.3100s.

The GBP/USD pair extended the previous day's rejection slide from the 1.3300 mark, or a two-and-half-week high, and witnessed some selling for the second successive day on Thursday. The intraday downfall dragged spot prices to a two-day low and was sponsored by modest US dollar strength. A slew of influential FOMC members, including Fed Chair Jerome Powell, left the door open for a larger rise in borrowing costs to bring down unacceptably high inflation. The speculations were further fueled by surging crude oil prices, which should continue to put upward pressure on the already elevated consumer prices. This, in turn, pushed the yield on the benchmark 10-year US government bond back closer to the  22-month high touched earlier this week and underpinned the greenback.

Meanwhile, tensions in Ukraine have shown no signs of de-escalating. This, along with the lack of progress in the Russia-Ukraine peace negotiations, further benefitted the safe-haven buck. On the other hand, the British pound was pressured by a dovish assessment of the Bank of England's view around the need for future rate hikes. Bulls failed to gain any respite from an unexpected rise in the UK Services PMI, which was offset by a larger drop in the gauge for the manufacturing sector. From the US, Durable Goods Orders fell short of market expectations, while the Weekly Initial Jobless Claims recorded a larger than anticipated fall during the week ended March 18. The mixed economic data did little to impress intraday traders or provide any meaningful impetus to the major.

That said, the risk-on impulse in the financial markets capped gains for the greenback and assisted the pair to find some support just ahead of mid-1.3100s. Nevertheless, the pair finally settled with modest intraday losses, though managed to gain strong positive traction during the Asian session on Friday. It, however, remains to be seen if bulls are able to capitalize on the move amid the risk of a further escalation in tensions between Russia and the West. In fact, the Biden administration rolled out more sanctions against Russia, targeting individuals and entities in response to its invasion of Ukraine. Adding to this, US President Joe Biden called for Russia to be expelled from the Group of Twenty forum of the world’s largest economies.

There isn't any major market-moving economic data due for release from the UK, leaving the pair at the mercy of the USD price dynamics. Meanwhile, the US economic docket features the release of revised Michigan Consumer Sentiment Index and Pending Home Sales data. The focus, however, will remain on geopolitical developments, which will influence the broader market risk sentiment. Apart from this, the US bond yields will drive demand for the USD and produce some meaningful trading opportunities around the pair on the last day of the week.

Technical outlook

From a technical perspective, the overnight slide stalled near support marked by the lower end of an ascending channel extending from the YTD low touched earlier this month. Given the recent sharp decline witnessed over the past one month or so, the said channel constitutes the formation of a bearish flag pattern on short-term charts. Traders, however, are likely to wait for sustained breakthrough the channel support, currently around mid-1.3100s, before positioning for any further depreciating move.

The pair would then turn vulnerable to accelerate the slide towards the 1.3100 round figure mark. Some follow-through selling will set the stage for the resumption of the prior well-established bearish trend and drag the pair back towards the key 1.3000 psychological mark.

On the flip side, any subsequent move up is likely to confront stiff resistance near the 1.3255-1.3260 region. Sustained strength beyond could allow bulls to make a fresh attempt to conquer the 1.3300 round-figure mark and lift the pair further towards the next relevant hurdle near the 1.3320-1.3325 region.