- GBP/USD staged a strong intraday recovery from a new yearly low hit earlier this Monday.
- The USD’s modest pullback from a two-decade high prompted some short covering around the pair.
- The divergent policy views of the Fed and the BoE warrant caution before making aggressive bullish bets.
The pair GBP/USD witnessed a dramatic intraday turnaround and rallied over 140 pips from its lowest level since June 2020 hit earlier this Monday. The rallying momentum pushed spot prices to a new daily high around the 1.2400 round figure during the mid-European session.
The US dollar pulled back a bit from a two-decade high as investors opted to take some gains off the table. This, in turn, was seen as a key factor helping the GBP/USD pair find some support before the mid-1.2200s and halt its Bank of England (BoE) inspired bearish momentum. That said, any significant recovery still looks elusive amid prospects for more aggressive Fed tightening, which should help limit deeper USD losses.
Markets seem convinced that the Fed would need to take more drastic action to rein in inflation and has been pricing in a further 200 bps hike in rates for the rest of 2022. Apart from this, concerns about rapidly rising prices consumer prices kept the yield on the benchmark 10-year US government bond near its highest level in more than a decade. This coupled with the prevailing risk aversion environment favors USD bulls and should cap the GBP/USD pair.
Furthermore, the BoE’s gloomy economic outlook, which said the economy was at risk of a recession, suggested that the current cycle of rate hikes may be coming to a halt. The resulting political outlook between the Fed and the BoE could further prevent traders from placing aggressively bullish bets on GBP/USD. Therefore, any subsequent upside move could still be seen as a selling opportunity and is at risk of fizzling out rather quickly.
In the absence of any major economic releases from either the UK or the US, US bond yields and broader market risk sentiment would boost USD demand. Traders will take a cue from a scheduled speech by BoE MPC member Michael Saunders which should weigh on the British pound and produce some trading opportunities around the GBP/USD pair. However, attention will remain on the release of the latest US consumer inflation figures on Wednesday.
Technical levels
Source: Fx Street
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