GBP/USD DROPS TO FRESH DAILY LOW, BACK CLOSER TO 1.2500 AMID BROAD-BASED USD STRENGTH

• GBP/USD met with a fresh supply on Wednesday and was pressured by a combination of factors.
• A pickup in the US bond yields and a softer risk tone revived demand for the safe-haven buck.
• The UK political turmoil undermined the British pound and further contributed to the selling bias.

The GBP/USD pair struggled to capitalize on the previous day’s solid bounce from a nearly three-week low and came under some renewed selling pressure on Wednesday. The pair extended its steady intraday descent through the first half of the European session and dropped to a fresh daily low, around the 1.2515-1.2510 region in the last hour.

Investors remain concerned that global supply chain disruption caused by the Russia-Ukraine war would continue to push consumer prices higher. This might force the US central bank to tighten its monetary policy at a faster pace, which, in turn, triggered a fresh leg up in the US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond moved back above 3.0%, closer to a nearly four-week high touched earlier this week. This, along with a softer risk tone, helped revive demand for the safe-haven US dollar and exerted downward pressure on the GBP/USD pair.

The market sentiment remains fragile amid worries that a more aggressive move by major central banks to constrain inflation could pose challenges to global economic growth. The British pound was also pressured by the UK political turmoil. British Prime Minister Boris Johnson survived the no-confidence vote on Monday, albeit at a much smaller margin than expected. Given that many MPs from within the Conservative Party voted against him, the development has raised uncertainty over Johnson’s future as the UK Prime Minister and could make it difficult for sterling to attract any buying.

The fundamental backdrop seems tilted in favour of bearish traders and supports prospects for a further near-term depreciating move. That said, market participants might refrain from placing aggressive bets and prefer to wait on the sidelines ahead of the US consumer inflation on Friday. The US CPI report will play a key role in determining the Fed’s tightening path, which will drive the USD and provide a fresh directional impetus to the GBP/USD pair. In the meantime, the US bond yields, along with the broader market risk sentiment, would influence the buck and allow traders to grab short-term opportunities.