- GBP/USD gains some positive traction on Tuesday, although the rally lacks bullish conviction.
- A nice USD bounce from a one-week low turns out to be a key factor limiting the pair’s upside.
- A significant decline seems unlikely before this week’s FOMC and BoE meetings.
The pair GBP/USD extends the previous day’s recovery move from around 1.1300, or its lowest level since 1985, and moves higher during the European session on Tuesday. The pair remains with modest intraday gains during the first part of the European session, although it seems that finds it hard to take advantage of the move above 1.1450 and pulls back a few pips from the daily high.
A combination of factors help the US dollar attract some buying after an early drop to a one-week low, which in turn acts as a headwind for the GBP/USD pair. Expectations that the Federal Reserve will maintain its cycle of faster rate hikes to control inflation they remain a support for elevated US Treasury yields. Indeed, the US central bank is expected to make another 75 basis point rate hike at the end of the two-day meeting on Wednesday.
Additionally, markets have been pricing in a slim chance of a full 100 basis point hike, which continues to support elevated US Treasury yields. The yield on the two-year rate-sensitive US government bond rose to its highest level since November 2007 and the 10-year Treasury bond hit a level not seen since April 2011 on Monday.. Aside from this, rising recession fears support the US dollar as a safe haven and also help to cap GBP/USD.
Market participants also appear reluctant to open aggressively bullish positions on the British pound amid a gloomy outlook for the UK economy. This largely overshadows the prospects for more aggressive rate hikes by the Bank of England, which has so far failed to impress the bulls or provide any significant boost to the GBP/USD pair. However, the downtrend looks supported as traders might prefer to stay on the sidelines ahead of key central bank events.
The Fed is scheduled to announce its monetary policy decision at the end of a two-day meeting on Wednesday. This will be followed by the BoE meeting on Thursday, which should help determine the next directional move for the GBP/USD pair. Meanwhile, on Tuesday, traders could follow the US housing market data, which together with US bond yields and broader risk sentiment, will boost demand for the dollar and provide some lift to the pair.
GBP/USD technical levels
Source: Fx Street
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