- GBP/USD staged a solid rebound from two-week lows hit earlier this Tuesday.
- Risk-off momentum weighed heavily on the safe haven USD and extended support for the pair.
- Aggressive Fed Expectations, Rising US Bond Yields Could Limit USD Loss and Cap GBP/USD.
USD intraday selling accelerated during the mid-European session and pushed the pair higher GBP/USD to a new daily high, around 1.3150 in the last hour.
The pair witnessed an intraday short-covering move and rallied around 100 pips from the 1.3050 area, or a two-week low hit earlier this Tuesday amid widespread US dollar weakness. Incoming geopolitical headlines raised hopes for a diplomatic solution to end the war in Ukraine and boosted investor confidence.
Indeed, the Russian Defense Ministry said it would reduce military activity in kyiv and Chernihiv to create conditions for dialogue. In addition to this, a Ukrainian negotiator noted that there have been enough developments to hold a meeting between Ukrainian President Volodymyr Zelenskyy and Russian President Vladimir Putin.
The latest developments triggered a risk-off rally in global equity markets, which, in turn, weighed heavily on the safe-haven dollar and was seen as a key factor behind the strong GBP/USD rally. That said, the fact that the Bank of England has softened its language on the need for further rate hikes acted as a headwind for sterling.
Instead, markets have been pricing in a more aggressive policy response from the Fed and a 50bp rate hike move in the next two meetings. This was reinforced by rising US Treasury yields, with 10-year Treasury yields holding above 2.5%, or a near three-year high, which should limit USD losses and help further cap GBP/USD.
Even from a technical perspective, the recent weakness below an uptrend channel signaled a breakout of the bear flag and favors bear traders. Therefore, it will be prudent to wait for some follow-up buying before confirming that GBP/USD has bottomed out and positioning for any further near-term appreciation moves.
Market participants now look to the US economic calendar, which features the JOLTS job openings release and the Conference Board’s Consumer Confidence Index. However, the focus will remain on new developments surrounding the Russia-Ukraine saga. This, along with US bond yields, will weigh on the USD and give the GBP/USD pair some momentum.
Technical levels
Source: Fx Street
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