- GBP/USD witnessed aggressive follow-through selling for the third successive day on Monday.
- Signs that the UK economy is under stress from soaring inflation weighed heavily on the GBP.
- Aggressive Fed rate hike bets, the risk-off mood pushed the USD to a more than two-year high.
- Oversold oscillators make it prudent to wait for some consolidation before the next leg down.
The GBP/USD pair continued losing ground through the first half of the European session and dived to its lowest level since September 2020, around the 1.2720-1.2715 region in the last hour.
The pair extended last week's sharp downfall from the vicinity of the 1.3100 round-figure mark and remained under intense selling pressure for the third successive day on Monday. The British pound was weighed down by Friday's disappointing release of the UK Retail Sales and the flash Services PMI. This, along with sustained US dollar buying, turned out to be a key factor that continued exerting downward pressure on the GBP/USD pair.
The Office for National Statistics reported on Friday that UK Retail Sales volumes fell 1.4% MoM in March and suggested that the expected consumption drag from high inflation might have arrived already. Adding to this, the flash PMI pointed to the biggest loss of momentum for service sector activity since Omicron hit businesses at the end of last year. The macro data indicated that the UK economy is under stress from the soaring cost of living.
On the other hand, the US dollar continued drawing support from expectations for a more aggressive policy tightening by the Fed and shot to a more than two-year high. On Thursday, Fed Chair Jerome Powell all but confirmed a 50 bps rate hike at the upcoming meeting in May and also hinted at consecutive increases this year. The markets were quick to react and are now pricing in jumbo rate hikes at the next four meetings in May, June, July and September.
Apart from this, prolonged COVID-19 lockdowns in China raised concerns about slowing global growth and tempered investors' appetite for perceived riskier assets. This was evident from a sea of red across the equity markets, which benefitted traditional safe-haven assets and provided an additional lift to the buck. The combination of supporting factors helped offset retreating US Treasury bond yields and remained supportive of the strong bid tone surrounding the USD.
Apart from this, some short-term trading stops being triggered on a sustained break below the 1.2800 mark further aggravated the bearish pressure and contributed to the GBP/USD pair's steep decline. This might have already set the stage for additional near-term losses. That said, extremely oversold RSI (14) on short-term charts warrants come caution for aggressive bearish traders, making it prudent to wait for some intraday consolidation before the next leg down.
