GBP/USD remains bearish around 1.2200

• GBP/USD fell to a nearly two-year low on Thursday in reaction to weaker UK macro data.
• The Fed’s aggressive rate hike bets continued to support the USD and added to the selling bias.
• Extreme oversold conditions helped limit losses, although the setup favors bearish traders.

The pair GBP/USD It managed to recover a few pips from a two-year low and was last seen trading just below 1.2200, shedding 0.50% on the day.

The pair extended the overnight rejection decline from the 1.2400 level and witnessed strong follow-up selling on Thursday, marking the sixth consecutive day of negative movement. The British pound took a hit following weaker macroeconomic data releases in the UK, which, along with sustained buying in US dollars, put pressure on the GBP/USD pair.

The UK’s preliminary GDP report showed that the British economy expanded by 0.8% during the first quarter of 2022 versus growth of 1.3% recorded in the previous quarter and 1.0% expected. Adding to this, the monthly GDP print was also below market expectations and showed that the economy contracted by 0.1% in March.

Separately, the Office for National Statistics (ONS) reported that industrial and manufacturing output declined 0.2% in March, both without consensus estimates. In addition, UK Goods Trade Balance data showed the deficit unexpectedly jumped to £23.897bn in March from £21.614bn in the previous month.

The data reaffirmed a gloomy economic outlook from the Bank of England and the National Institute for Economic and Social Research (NIESR), warning that Britain is on track to enter a technical recession. This, in turn, suggested that the current rate hike cycle might be coming to a pause and dragged sterling lower across the board.

On the other hand, the US dollar continued its recent strong upward trend and soared to its highest level since December 2002 amid firm expectations of more aggressive policy tightening by the Federal Reserve. Wednesday’s release of the US CPI reaffirmed market bets for a move of at least 50 bps of rate hikes from the Fed at the upcoming policy meetings on June 15 and July 27.

The prospect of rapid rate hikes in the US, coupled with tight global supply chains resulting from China’s zero COVID policy and the war in Ukraine, fueled concerns about a potential recession. This, in turn, affected global risk sentiment, which was evident in a prolonged sell-off in equity markets and further benefited the safe-haven dollar.

That said, the extreme oversold conditions did help limit further losses for the GBP/USD pair, just for now. However, the fundamental backdrop remains tilted in favor of bearish traders, suggesting that any recovery attempts are at risk of moderating rather quickly.

Technical levels