GBP/USD drops to 1.2700 neighbourhood, flirts with YTD low amid stronger USD

• GBP/USD turned lower for the fourth straight day amid sustained USD buying interest.
• Aggressive Fed rate hike bets, the risk-off mood pushed the USD to over a two-year high.
• Diminishing odds for any further tightening by the BoE also weighed on the British pound.

The GBP/USD pair witnessed some selling during the early part of the European session and dropped to the 1.2700 neighbourhood, back closer to the YTD low touched the previous day.

Following an early uptick to the 1.2770 region, the GBP/USD pair met with a fresh supply on Tuesday and turned lower for the fourth successive day amid the emergence of fresh US dollar buying. The prospects for rapid interest rate hikes in the US, along with the prevalent risk-off mood, pushed the USD to its highest level since March 2020 and exerted downward pressure on spot prices.

The markets have been betting on a more aggressive policy tightening by the Fed and expect a 50 bps rate hike at each of the next four FOMC meetings in May, June, July and September. Apart from this, fresh COVID-19 lockdowns in China fueled concerns about a global economic slowdown, which took its toll on the global risk sentiment and benefitted traditional safe-haven assets, including the buck.

On the other hand, the British pound was weighed down by the recent disappointing domestic data, which indicated that the UK economy is under stress from the soaring cost of living. This forced investors to scale back their bets on future interest rate hikes by the Bank of England and supports prospects for a further depreciating move for the GBP/USD pair amid absent relevant economic releases from the UK.

Later during the early North American session, traders will take cues from the US economic docket - featuring the release of Durable Goods Orders and the Conference Board's Consumer Confidence Index. Apart from this, the broader market risk sentiment will influence the USD price dynamics and produce some short-term trading opportunities around the GBP/USD pair.

Technical levels to watch