GBP/USD falls below 1.2400 amid modest USD strength

• GBP/USD witnesses aggressive selling on Wednesday and breaks a three-day gain streak.
• The latest UK CPI report fuels stagflation fears and weighs heavily on the British pound.
• The appearance of some buying around the USD further contributes to the intraday selling trend.

The pair GBP/USD extends its heavy intraday losses and falls to a new daily low near 1.2370 during the first part of the European session on Wednesday. At time of writing, the pair is slightly recovering towards 1.2420, still down 0.59% on the day.

The GBP/USD pair, which failed to conquer the psychological level of 1.2500, witnessed an aggressive sell-off on Wednesday and snapped a three-day winning streak to a two-week high. The pound sterling weakened across the board after data releases from the UK showed that headline CPI soared to 9% level in April, the highest level in the last 40 years. Given that UK economic activity had slowed down sharply in the first quarter, data further fueled stagflation fears. Furthermore, the impasse between the UK and the EU over the Northern Ireland protocol put additional downward pressure on the pound sterling.

In recent events, The British government on Tuesday announced a bill that would effectively undo parts of the Brexit deal. The European Commission had promised to respond with all the measures at its disposal if Britain goes ahead with a plan to rewrite the Northern Ireland protocol. Investors now fear that the legislation could trigger a trade war amid a rising cost of living, which would take its toll on the British economy and validate the Bank of England’s gloomy outlook. This, along with modest US dollar strength, contributed to the GBP/USD slide.

The dollar was in demand again and halted its recent corrective decline from two-decade highs, amid some firmer expectations of a tightening of monetary policy by the Fed. The markets seem convinced that the US central bank would have to take more drastic measures to control inflation. Expectations were reinforced by Fed Chairman Jerome Powell’s remarks at a Wall Street Journal event, in which he stated that will support interest rate hikes until prices start to fall towards a healthy level. Aside from this, further downward movement in equity markets underpinned the dollar as a safe haven.

With the latest move lower, the GBP/USD pair has given back a significant part of the previous day’s gains. That said, it will be wise to wait for a strong follow-up of selling before confirming that the recent bounce from the 1.2155 area, or the lowest level since May 2020, is over.

GBP/USD technical levels