GBP/USD struggles near its lowest level since May 2020, keeps the red below 1.2200

• GBP/USD dropped to a near two-year low on Thursday in reaction to softer UK macro data.
• Aggressive Fed rate hike bets continued underpinning the USD and added to the selling bias.
• Extremely oversold conditions helped limit losses, though the set-up favours bearish traders.

The GBP/USD pair managed to rebound a few pips from a two-year low and was last seen trading just below the 1.2200 mark, down nearly 0.50% for the day.

The pair extended the overnight rejection slide from the 1.2400 mark and witnessed heavy follow-through selling on Thursday, marking the sixth successive day of a negative move. The British pound took a hit following the release of weaker UK macro data, which, along with sustained US dollar buying exerted pressure on the GBP/USD pair.

The Preliminary UK GDP report showed that the British economy expanded by 0.8% during the first quarter of 2022 as against the 1.3% growth recorded in the previous quarter and the 1.0% anticipated. Adding to this, the monthly GDP print also fell short of market expectations and came in to show that the economy contracted by 0.1% in March.

Separately, the Office for National Statistics (ONS) reported that Manufacturing and Industrial output declined by 0.2% in March, both missing consensus estimates. Moreover, the UK goods trade balance data showed that the deficit unexpectedly jumped to £23.897 billion in March from £21.614 billion recorded in the previous month.

The data reaffirmed a bleak economic outlook by the Bank of England and the National Institute of Economic and Social Research (NIESR), warning that Britain is on course to enter a technical recession. This, in turn, suggested that the current rate hike cycle could be nearing a pause and dragged sterling lower across the board.

On the other hand, the US dollar prolonged its recent strong bullish run and shot to its highest level since December 2002 amid firming expectations for a more aggressive policy tightening by the Fed. Wednesday's release of the US CPI reaffirmed market bets for at least a 50 bps Fed rate hike move at the upcoming policy meetings on June 15 and July 27.

The prospects for rapid rate hikes in the US, along with tight global supply chains resulting from China's zero-COVID policy and the war in Ukraine, fueled worries about a possible recession. This, in turn, took its toll on the global risk sentiment, which was evident from an extended sell-off in the equity markets and further benefitted the safe-haven buck.

That said, extremely oversold conditions helped limit further losses for the GBP/USD pair, only for the time being. Nevertheless, the fundamental backdrop remains tilted in favour of bearish traders, suggesting that any attempted recovery runs the risk of fizzling out rather quickly.

Technical levels to watch