- GBP/USD gains some traction on Tuesday amid a modest USD pullback from a 20-year high.
- Worries about the ballooning UK debt could act as a headwind for sterling and cap the upside.
- Aggressive Fed rate hike bets should limit the USD losses and warrant some caution for bulls.
The GBP/USD pair attracts some buying on Tuesday and maintains its bid tone above the 1.0800 mark through the early European session.
A combination of factors triggers a modest US dollar pullback from a new two-decade high touched the previous day, which, in turn, is seen acting as a tailwind for the GBP/USD pair. The risk-on impulse, along with retreating US Treasury bond yields, prompts traders to take some profits off their bullish positions around the safe-haven greenback.
The British pound, on the other hand, draws some support from the overnight special statement from the Bank of England, saying that it will not hesitate to change interest rates as necessary. The BoE added that it is monitoring developments in financial markets very closely, especially after the recent free-fall in the GBP/USD pair to an all-time low.
Despite the aforementioned supporting factors, the GBP/USD pair, so far, has been struggling to gain any meaningful traction. The lack of confidence in the UK government’s ability to manage the ballooning debt, especially after the announcement of a mini-budget on Friday, continues to act as a headwind for sterling and capping the upside.
Furthermore, the prospects for a more aggressive policy tightening by the Federal Reserve should limit any deeper fall for the US bond yields and offer some support to the greenback. This might further contribute to keeping a lid on any meaningful gains for the GBP/USD pair, warranting some caution for aggressive bullish traders.
Nevertheless, it is possible that the steep decline to Monday's deep 1.0350 lows could mark the final stage of a bearish exhaustion move – a sort of exagerated market blow off to an intermediate or longer-term bottom. This often happens when price accelerates its descent and breaks down out of the confines of a falling channel as happened to cable on Friday, September 23, when it broke out of a channel it has been in since the start of the year. It is still too early to be sure but traders ought to be aware of the possibility. It will take a few more days – weeks to be certain – if the pair has found a bottom and is reversing onto a more sustainable recovery path.
There isn't any major market-moving UK economic released due on Tuesday, leaving the GBP/USD pair at the mercy of the USD price dynamics. Hence, the focus now shifts to Fed Chair Jerome Powell's speech at an event in Paris. This, along with the US macro data, will drive the USD demand and provide some impetus to the GBP/USD pair.
Technical levels to watch
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