GBP/USD CLIMBS FURTHER BEYOND 1.2300 MARK, LACKS FOLLOW-THROUGH BUYING

• GBP/USD gained traction for the second straight day amid broad-based USD weakness.
• The risk-on impulse was seen as a key factor that undermined the safe-haven greenback.
• Fed rate hike bets, dovish BoE expectations, recession fears, Brexit woes might cap gains.

The GBP/USD pair added to the previous day’s modest gains and scaled higher for the second successive day on Tuesday. The steady intraday ascent extended through the first half of the European session and lifted spot prices to a two-day high, around the 1.2325 region in the last hour.

The risk-on impulse – as depicted by the strong rally across the global equity markets – undermined the safe-haven US dollar. Apart from this, signs that there will not be any consensus for a 100 bps rate hike in the foreseeable future exerted heavy downward pressure on the USD, which, in turn, extended support to the GBP/USD pair.

Fed Governor Christopher Waller said on Sunday that he was “all in” on bringing down inflation and was open to another rate hike of 75 bps in July, though ruled out the more extreme scenario of a 100 bps hike. The markets, however, seem convinced that the Fed would stick to its aggressive policy tightening path to curb soaring inflation.

Furthermore, concerns that rapid interest rate hikes by major central banks would pose challenges to the global economic recovery should keep a lid on any optimistic move in the markets. The fundamental backdrop favours the USD bulls, warranting some caution before placing aggressive bullish bets around the GBP/USD pair.

On the other hand, the Bank of England is expected to adopt a more gradual approach to raising interest rates amid recession fears. This, along with the UK-EU impasse over the Northern Ireland Protocol of the Brexit agreement, should act as a headwind for the British pound and further contribute to capping gains for the GBP/USD pair.

This makes it prudent to wait for strong follow-through buying before positioning for an extension of the recent bounce from the YTD low, around the 1.1935 region touched last week. Traders now eye the US Existing Home Sales data, which, along with the US bond yields and the broader risk sentiment, will influence the USD and provide a fresh impetus to the GBP/USD pair.