GBP/USD surrenders modest intraday gains, hangs near daily low ahead of Powell’s testimony

• GBP/USD attracts some intraday selling following an early move up to a four-day peak.
• Recession fears, hawkish Fed expectations act as a tailwind for the USD and cap gains.
• Traders now keenly await Fed Chair Powell’s testimony before placing directional bets.

The GBP/USD pair struggles to capitalize on its intraday positive move to a four-day peak and meets with a fresh supply near the 1.2065 region on Tuesday. Spot prices retreat to the lower end of the daily range, around the 1.2020-1.2015 region during the first half of the European session and remain at the mercy of the US Dollar price dynamics.

A generally positive tone around the equity markets, along with retreating US Treasury bond yields, initially weighed on the safe-haven Greenback and offered some support to the GBP/USD pair. That said, looming recession risks continue to keep a lid on any optimistic move in the markets. Apart from this, the prospects for further policy tightening by the Federal Reserve act as a tailwind for the US bond yields, which, in turn, help limit the downside for the USD and cap the upside for the major, at least for the time being.

Investors seem convinced that the US central bank will stick to its hawkish stance and keep interest rates higher for longer in the wake of stubbornly high inflation. The bets were reaffirmed by the incoming US macro data, which indicated that inflation isn't coming down quite as fast as hoped and pointed to an economy that remains resilient despite rising borrowing costs. Moreover, a slew of FOMC policymakers recently backed the case for higher rate hikes and opened the door for a 50 bps lift-off at the March meeting. 

Hence, the market focus will remain glued to Fed Chair Jerome Powell's semi-annual congressional testimony on Tuesday and Wednesday. Investors will look for clues about the Fed's future rate-hike path, which will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the GBP/USD pair. In the meantime, anxiety over the new UK-EU Brexit deal on the Northern Ireland Protocol further seems to hold back the bullish traders from placing fresh bets around the major.

The price action, meanwhile, indicates that an additional rate hike by the Bank of England (BoE) is already fully priced in the markets. Moreover, some analysts still hope that the UK central bank would pause the current tightening cycle. This, in turn, suggests that the path of least resistance for the GBP/USD pair is to the downside and any meaningful upside could be seen as a selling opportunity. That said, sustained weakness below the 200-day Simple Moving Average (SMA) is needed to confirm a fresh bearish breakdown.

Technical levels to watch