GBP/USD trims part of decent intraday gains, pulls back to 1.0750

• GBP/USD gains some positive traction on Tuesday, although the rally lacks bullish conviction.
• Concerns over bloated UK government debt are acting as a headwind for the British pound.
• The Fed’s aggressive rate hike bets help limit the dollar’s corrective decline and help limit it.

The pair GBP/USD trims some of its intraday gains and pulls back to 1.0750 during the early American session, though still up more than 0.50% on the day.

Last week’s new UK government’s mini-budget announcement, as well as a plan to subsidize household and business energy bills, sparked concerns about spiraling public debt. This is demonstrated by a further slump in the UK bond market, taking the 30-year yield to its highest level since 2007. In addition, the fiscal package is expected to fuel already high inflation and create additional economic headwinds, which, in turn, is seen as acting as a headwind for the British pound.

That said, modest US dollar weakness continues to lend support to the GBP/USD pair amid speculation that the Bank of England could intervene in the forex market to stabilize the domestic currency. The risk appetite boost, represented by the strong rally in equity markets, turns out to be a key factor undermining the dollar’s haven. That said, rising US Treasury yields, bolstered by expectations of a more aggressive Fed policy tightening, cap any significant corrective pullback in the dollar.

The mixed fundamental background warrants some caution for aggressive traders and before making further directional bets around the GBP/USD pair. From a technical point of view, the lack of strong buying interest, especially after the recent free fall to an all-time low, suggests that the short-term downtrend may be far from over. Therefore, any move higher could be seen as a selling opportunity amid lack of confidence in the UK government’s ability to manage mounting debt.

Technical levels to watch