- GBP/USD struggled to preserve its modest recovery gains amid the emergence of USD dip-buying.
- Recession fears kept a lid on the optimistic move in the markets and benefitted the safe-haven buck.
- Fed rate hike bets favour the USD bulls and support prospects for additional losses for the major.
The GBP/USD pair surrendered modest intraday recovery gains and dropped to the lower boundary of its daily trading range during the first half of the European session. The pair was last seen hovering around the 1.2115-1.2110 area, just a few pips above a two-year low touched the previous day.
The early optimistic move in the equity markets fizzled out rather quickly amid concerns that a more aggressive move by major central banks to curb inflation would pose challenges to the global economy. This assisted the safe-haven US dollar to trim a part of its intraday losses, which, in turn, was seen as a key factor that attracted fresh selling around the GBP/USD pair.
The greenback further drew support from firming expectations the Fed would raise interest rates at a faster pace than expected to cool price pressures. The bets were reaffirmed by the latest US consumer inflation figures, which surged to over a four-decade high in May. In fact, Fed funds futures indicate the possibility of at least one jumbo 75 bps rate hike by the September meeting.
Moreover, investors now expect the officials to raise rates to nearly 4% by next spring, up from last month’s expected peak of around 3%. This should continue to act as a tailwind for the US bond yields and the USD. The fundamental backdrop supports prospects for a further decline for the GBP/USD pair, though traders might prefer to wait ahead of the key central bank event risk.
The Fed is scheduled to announce the outcome of a two-day monetary policy meeting on Wednesday. This will be followed by the Bank of England decision on Thursday, which will help determine the next leg of a directional move for the GBP/USD pair. In the meantime, traders might take cues from the broader market risk sentiment to grab short-term opportunities on Tuesday.
