GBP/USD drops back closer to 1.2500 mark ahead of the BoE policy decision

• GBP/USD struggled to capitalize on the overnight post-FOMC rally and met with a fresh supply on Thursday.
• The prospects for a further tightening by the Fed revived the USD demand and exerted downward pressure.
• The downside seems cushioned as the market focus now shifts to the latest Bank of England policy decision.

The GBP/USD pair extended its steady intraday descent through the early European session and dropped to a fresh daily low, around the 1.2515 region in the last hour.

The pair came under some renewed selling pressure on Thursday and reversed a major part of the previous day's post-FOMC strong move up to the 1.2635-1.2640 region, or over a one-week high. It is worth recalling that the Fed announced the largest rate hike since 2000 and the start of quantitative tightening (QT). The US central bank, however, downplayed the possibility of super-size hikes and prompted aggressive US dollar long-unwinding and provide a goodish lift to the GBP/USD pair.

That said, the markets are still pricing in a further 200 bps rate hike for the rest of 2022, which was reinforced by a fresh leg up in the US Treasury bond yields. This, along with concerns about rising COVID-19 cases and strict lockdowns in China, assisted the safe-haven greenback to make a solid comeback and exerted downward pressure on the GBP/USD pair. The downside, however, seems limited as investors might refrain from placing aggressive bets ahead of the Bank of England meeting.

The UK central bank looks poised to raise interest rates for the fourth time since December to the highest level in 13-years to contain inflation, which has leapt to a 30-year high. The overnight index swaps markets predict that the BoE will hike six more times in 2022, which might have already set the stage for a disappointment. Given that the MPC voted 8-1 in favour of the 25 bps rise in March, any sign of widening dissents to keep the interest rate unchanged would be seen as a dovish tilt.

This would further suggest that the rate hike cycle could be nearing a pause and weigh heavily on the British pound, paving the way for the resumption of a three-week-old downtrend. Heading into the key event risk, the release of the final UK Services PMI might do little to impress traders or provide any meaningful impetus to the GBP/USD pair. Even the US Weekly Initial Jobless Claims, due later during the early North American session, is likely to be overshadowed by the post-BoE volatility.

Technical levels to watch