GBP/USD trims early losses, remains bearish around 1.2439

• A combination of factors caused an aggressive sell around GBP/USD on Wednesday.
• A good rebound in dollar demand was seen as a key factor behind the initial leg down.
• The UK CPI report fueled stagflation fears and weighed on sterling amid fresh Brexit woes.

The pair GBP/USD pared some of its steep intraday losses and was last seen trading near the 1.2420 region, down 0.50% on the day during the early American session.

The pair struggled to build on its recent strong rebound from last week’s two-year low and faced rejection near the key psychological 1.2500 level on Wednesday. The initial drop was supported by the appearance of some purchases in the declines of the dollar, reinforced by expectations of a more aggressive adjustment of the US central bank’s policy.

In fact, the markets seem convinced that the Federal Reserve would have to take more drastic measures in the next meetings to control inflation. These bets were bolstered by Fed Chairman Jerome Powell’s hawkish comments on Tuesday, in which he stated that he will support interest rate hikes until prices begin to fall towards a healthy level.

Investors also remain concerned that the war between Russia and Ukraine, coupled with the latest COVID-19 lockdowns in China, will cause global supply chains to tighten and push consumer prices even higher. This in turn
pushed the benchmark 10-year US government bond yield back close to the 3.0% threshold, helping the dollar regain positive traction.

The dollar maintained its bid tone after the release of US housing market data. US housing starts fell 0.2% in April to 1.724 million, down from 1.728 million the previous month and disappointing expectations for a rise to 1.765 million. Meanwhile, Building Permits fell 3.2% in April to 1.819 million, from 1.879 million previously, although that was better than the drop to 1.812 million expected.

On the other hand, sterling came under pressure from stagflation fears and the impasse between the UK and the EU over the Northern Ireland protocol. As UK economic activity slowed sharply in the first quarter, the latest consumer inflation figures reaffirmed the Bank of England’s gloomy outlook and weighed on the pound.

As for Brexit, the UK government on Tuesday announced a bill that would effectively undo parts of the Brexit deal. The European Commission had promised to respond with all possible measures if Britain goes ahead with a plan to rewrite the protocol of independent countries. Investors now fear the legislation could trigger a trade war and take a toll on the British economy.

Despite the negative factors, the pair showed resistance at the 1.2400 round level and found decent support near the 1.2370 area. This warrants some caution before confirming that the recent bounce from the 1.2155 area, or the lowest level since May 2020 hit last week, has run its course and placing aggressive bearish bets on GBP/USD.

Technical levels