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GBP/USD drifts lower for the second successive day, though the downside seems limited.
Rising US bond yields, along with a softer risk tone, benefit the USD and exert pressure.
Traders, however, seem reluctant ahead of this week’s key data/central bank event risks.
The GBP/USD pair attracts some sellers for the second successive day on Tuesday and remains on the defensive heading into the European session. The pair currently trades around the 1.2775-1.2770 region, or a three-day low, still not far away from its highest level since April 2022 touched last Friday.
The US Dollar (USD) builds on its recent recovery from over a one-month low and is seen as a key factor exerting downward pressure on the GBP/USD pair. The Federal Reserve (Fed) last week paused its year-long policy tightening cycle, but signalled that borrowing costs may still need to rise as much as 50 bps and forecasted a higher peak interest rate this year. The hawkish outlook triggers a fresh leg up in the US Treasury bond yields, which along with a softer risk tone, pushes the safe-haven buck higher for the third straight day.
Worries about a global economic slowdown, particularly in China, overshadow an interest rate cut by the People’s Bank of China (PBoC). This is evident from a weaker sentiment surrounding the equity markets and drives some haven flows towards the Greenback. The USD bulls, however, seem reluctant to place aggressive bets and prefer to wait for fresh cues about the Fed’s future rate hike path. It is worth recalling that the incoming softer US macro data raised questions over how much headroom the US central bank has to keep raising rates.
Hence, the focus will remain glued to Fed Chair Jerome Powell’s congressional testimony on Wednesday and Thursday. Apart from this, speeches by a slew of influential FOMC members will play a key role in driving the USD demand. In the meantime, expectations that the Bank of England (BoE) will be far more aggressive in policy tightening to combat high inflation should limit losses for the GBP/USD pair. This might hold back traders from placing fresh bets ahead of the UK consumer inflation figures on Wednesday and the BoE meeting on Thursday.
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