- GBP/USD found fresh supply on Tuesday and broke the streak of four consecutive days of gains.
- Rebounding US bond yields and risk aversion buoyed the safe-haven dollar and put pressure on it.
- The gloomy outlook for the UK economy favors the prospect of further losses amid Brexit woes.
The pair GBP/USD saw some selling on Tuesday and snapped a four-day winning streak amid resurgent demand for the US dollar. The intraday retracement from near one-month highs extended into the middle of the European session and dragged the price to a fresh daily low around the 1.2585 area.
Federal Reserve Governor Christopher Waller’s comments triggered a further rise in US Treasury yields, which in turn helped the dollar recover. At an event in Frankfurt, Waller advocated a 50 basis point rate hike during several meetings until inflation comes back close to the central bank’s target. This, coupled with the risk-off momentum, provided additional support for the safe-haven dollar and put downward pressure on the GBP/USD pair.
Market sentiment remains fragile on doubts that central banks can raise interest rates to curb inflation without affecting economic growth. Concerns resurfaced after the release of official Chinese PMIs, which showed that business activity in both the manufacturing and services sectors contracted in May. In addition, fears that global supply chain disruption will drive consumer prices higher further dampened investors’ appetite for riskier assets.
On the other hand, the British pound was pressured by concerns about the cost of living crisis, which the Bank of England warned could push the UK into recession later in 2022. In addition, British government legislation – that would effectively nullify parts of a Brexit deal – has raised fears of a trade war. This, coupled with expectations that a large rate hike by the Bank of England will take its toll on the UK economy, adds to the gloomy outlook for sterling.
The fundamental backdrop appears to be tilting in favor of the bears and supports the prospects for a further downside move in the short term. That said, investors may refrain from making aggressive bets ahead of major US macroeconomic data releases this week, scheduled for the start of a new month, including the highly anticipated NFP report. Meanwhile, traders will be guided by Tuesday’s release of the Conference Board’s US Consumer Confidence Index.
Technical levels
Source: Fx Street
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