GBP/USD hangs just above two-week low, seems vulnerable to slide further
- GBP/USD struggles to capitalize on the overnight late rebound from a two-week low.
- The Fed’s hawkish outlook underpins the USD and acts as a headwind for the major.
- The BoE’s aggressive rate hike fuels recession fears and weighs on the British Pound.
The GBP/USD pair oscillates in a narrow trading band during the Asian session on Thursday and consolidates the overnight slump to the 1.2600 neighbourhood, or a two-week low. The pair currently trades around the 1.2630-1.2625 region, down less than 0.10% for the day, and seems vulnerable to prolonging its recent corrective decline from the YTD peak touched earlier this month.
The US Dollar (USD) stands tall near a two-week high in the wake of Federal Reserve Chair Jerome Powell's hawkish remarks on Wednesday and is seen as a key factor weighing on the GBP/USD pair. Speaking at a European Central Bank (ECB) conference, Powell reiterated that two rate increases are likely this year and did not rule out the possibility of a rate hike at the next FOMC policy meeting on July 25-26. Powell also said that he does not see inflation coming down to the Fed's 2% target until 2025.
The British Pound (GBP), on the other hand, is weighed down by fears that the UK economy is heading for recession, especially after a surprise 50 bps rate hike by the Bank of England (BoE) last Thursday. Investors also seem worried that further increases in interest rates will spark a mortgage crisis and raise borrowing costs for government debt. The fears were further fueled by BoE Governor Andrew Bailey's comments, hinting that rates could remain at peak levels for longer than traders currently expect.
The aforementioned fundamental backdrop seems tilted in favour of bearish traders and suggests that the path of least resistance for the GBP/USD pair is to the downside. Some follow-through selling below the overnight swing low will reaffirm the negative bias and pave the way for a further near-term depreciating move. Market participants now look to the US economic docket - featuring the final Q1 GDP print, the Weekly Initial Jobless Claims and Pending Home Sales - for a fresh impetus.
Technical levels to watch