• GBP/USD witnessed strong selling for the third day in a row amid broad dollar strength.
• The strength of the CPI for May in the US reaffirmed the expectations of the Federal Reserve and boosted the USD.
• The risk aversion momentum reinforced the dollar as a haven and put pressure on the pair.

The pair GBP/USD extended its rejection drop this week from the 1.2600 area and witnessed a follow up sell-off for the third day in a row on Friday. Intraday selling accelerated during the early American session and dragged the pair to three-week lows below 1.2400.

The US dollar added to its intraday gains and soared to the highest level since May 19, in reaction to stronger-than-expected US consumer inflation figures. Indeed, the US headline CPI rose 1.0% mom in May, vs. 0.7% expected, and the annual rate jumped to a new 40-year high of 8.6%. Additionally, core inflation, which excludes food and energy prices, rose 0.6% mom and 6.0% mom, beating consensus estimates of a 0.5% and 5.9% reading, respectively.

The data raised bets for a more aggressive tightening of the Federal Reserve’s monetary policy, which was reflected in a strong rebound in shorter-dated US bond yields. In addition, markets are pricing in a 50 basis point rate hike at each of the June, July and September meetings. This, coupled with the worsening global economic outlook, triggered a new wave of risk aversion globally, which further benefited the safe-haven dollar and contributed to the heavily bid tone surrounding the GBP/USD pair.

From a technical point of view, the intraday break of the previous weekly low around the 1.2430 area was seen as a new trigger for bearish traders. The subsequent drop and acceptance below 1.2400 could have already set the stage for further losses towards the 1.2330-1.2325 support. The bearish trajectory could extend further towards the 1.2300 round figure heading towards the 1.2240 area before GBP/USD finally drops below 1.2200 levels.

Technical levels