- A combination of factors failed to assist GBP/USD to capitalize on its modest intraday move up.
- The BoE’s gloomy economic outlook continued weighing on the British pound and capped gains.
- Aggressive Fed rate hike bets, recession fears underpinned the USD and attracted fresh selling.
The GBP/USD pair surrendered its modest intraday gains and dropped to a fresh daily low, around the 1.2320-1.2315 region during the early European session.
The pair continued with its struggle to register any meaningful recovery and remained well within the striking distance of its lowest level since June 2020, around the 1.22060 region touched on Monday. The Bank of England's bleak economic outlook suggested that the current rate hike cycle could be nearing a pause. It is worth recalling that the UK central bank raised interest rates to their highest level since 2009 but warned that the economy was at the risk of a recession. This was seen as a key factor that acted as a headwind for the British pound and capped the GBP/USD pair amid the underlying strong bullish sentiment surrounding the US dollar.
The greenback continued drawing support from the prospects for a more aggressive policy tightening by the Fed. In fact, the markets seem convinced that the US central bank needs to take more drastic action to curb soaring inflation and are still pricing in a further 200 bps rate hike for the rest of 2022. The expectations for rapid rate hikes in the US, along with strict COVID-19 lockdowns in China have been fueling fears about softening global growth and a possible recession. This offered benefitted the safe-haven buck and attracted fresh selling around the GBP/USD pair. That said, a softer tone around the US Treasury bond yields could cap the USD.
Apart from this, a goodish recovery in the equity markets could hold back the USD bulls from placing fresh bets and help limit losses for the GBP/USD pair. Investors might also prefer to wait on the sidelines ahead of the latest US consumer inflation figures on Wednesday and the UK GDP report on Thursday. Nevertheless, the fundamental backdrop supports prospects for an extension of the pair's downward trajectory. In the absence of any major market-moving economic releases, either from the UK or the US, the USD price dynamics would continue to play a key role in influencing the pair and producing short-term trading opportunities.
Technical levels to watch
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