- GBP/USD is witnessing a sharp pullback from the 2 1/2 week high hit on Wednesday.
- A dovish assessment of the BoE’s decision last week acts as a headwind for the British pound.
- The appearance of some buying around the USD further contributes to the intraday drop of around 100 pips.
The pair of GBP/USD moves lower during the first half of the European session on Wednesday and falls to a new daily low near the 1.3200 level.
The pair saw an intraday reversal from the 1.3200 region, or a 2 1/2 week high hit earlier this Wednesday, and has now given back some of the previous day’s strong gains. The fact that the Bank of England would have softened its language on the need for future rate hikes at last week’s meeting turned out to be a key factor that acted as a headwind for the British pound.
This, to a greater extent, overshadowed the hotter than expected UK consumer inflation figures and put some downward pressure on the GBP/USD pair amid the appearance of some buying around the US dollar. The Headline CPI accelerated to its highest level since March 1992, reaching 6.2% year-on-year in February. This was above the expected rise to 5.9% from 5.5% in January, although it failed to impress bulls.
Conversely, the dollar gained support from the recent rally in US treasury yieldsreinforced by the Fed’s aggressive outlook. It is worth remembering that the Fed indicated last week that it could raise rates at the remaining six meetings in 2022. Additionally, Fed Chairman Jerome Powell suggested that the US central bank could adopt a more aggressive response to combat high inflation.
San Francisco Fed President Mary Daly signaled it was time to undo easing, while St. Louis Fed President James Bullard and Loretta Mester of Cleveland they asked for faster uploads. Markets reacted quickly and began pricing in a 50 basis point rate hike at the next FOMC meeting. This, in turn, pushed benchmark 10-year US government bond yield at highest level since 2019.
Apart of this, the lack of progress in the peace negotiations between Russia and Ukraine weighed on investors’ appetite for riskier assets perceived. This was evident from the modest pullback in equity markets, which further benefited the safe-haven USD against its British counterpart. The combination of factors contributed to the intraday drop of the GBP/USD pair of around 100 pips.
Market participants are now awaiting remarks from Fed Chairman Jerome Powell and BoE Governor Andrew Baily at today’s BIS Innovation Summit. Apart from this, the invesoes will take clues from the new developments around the war between Russia and Ukraine. This coupled with US bond yields will influence USD price action and could create some opportunities around the GBP/USD pair.
GBP/USD technical levels
Source: Fx Street
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