GBP/USD Outlook: Doubts over further BoE rate hikes favour bears, focus on FOMC minutes

• GBP/USD came under intense selling pressure on Tuesday in reaction to disappointing UK PMIs.
• The data forced investors to scale back their bets for further BoE rate hikes and weighed on sterling.
• Sustained USD selling extended some support, though Brexit woes capped any meaningful gains.

The GBP/USD pair witnessed a dramatic intraday turnaround on Tuesday and plunged over 125 pips from the 1.2600 neighbourhood, snapping a three-day winning streak. The steep decline followed the disappointing release of UK PMI prints, which showed a sharp deceleration in growth during May and raised concerns about a possible recession. In fact, the flash S&P/CIPS Services PMI missed market expectations by a big margin and tumbled to a 15-month low level of 51.8. Adding to this, the flash Manufacturing PMI fell to 54.6 from 55.8 in the previous month. The data reaffirmed the Bank of England's gloomy economic outlook and forced investors to scale back bets for any further rate hikes in the near future, which, in turn, weighed heavily on the British pound.

Spot prices reversed the previous day's positive move to a nearly three-week high, though sustained US dollar selling helped limit any further losses. Given that at least a 50 bps Fed rate hike at the next two meetings is fully priced in, the idea that the US central bank could pause the rate hike cycle later this year undermined the buck. This, along with the global flight to safety, dragged the US Treasury bond yields lower and exerted additional downward pressure on the greenback. Apart from this, a strong pickup in the shared currency - bolstered by hawkish comments by the ECB policymakers - dragged the USD Index to a fresh monthly low. Weaker US macro data - flash PMIs, New Home Sales and Richmond Manufacturing Index - also did little to provide any respite to the USD bulls.

This, in turn, was seen as the only factor that extended some support to the GBP/USD pair, though modest pickup in the USD demand during the Asian session on Wednesday capped the upside. The British pound was undermined by the UK-EU impasse over the Northern Ireland protocol. In fact, the British government last week announced legislation that would effectively override parts of a Brexit deal, fueling fears about a trade war in the middle of the cost-of-living crisis. In the absence of any major market-moving economic releases from the UK, the fundamental backdrop suggests that the path of least resistance for the major is to the downside. Hence, any attempted move up could be seen as a selling opportunity amid fresh Brexit jitters over the Northern Ireland protocol.

It is worth mentioning that the British government last week announced legislation that would effectively override parts of a Brexit deal. The European Commission had pledged to respond with all measures at its disposal if Britain moves ahead with the plan, fueling fears about a trade war in the middle of the cost-of-living crisis. This, in turn, might continue to act as a headwind for sterling and keep a lid on the major.

Later during the early North American session, traders will take cues from the US economic docket - featuring the release of Durable Goods Orders. The key focus, however, will remain on the FOMC monetary policy meeting minutes. Investors will look for clues about the possibility of a jumbo 75 bps Fed rate hike move in June, which will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the GBP/USD pair.

Technical outlook

From a technical perspective, the pair on Tuesday showed some resilience and bounced from the 100-hour SMA. The said support, currently near the 1.2500 psychological mark, should now act as a pivotal point for intraday traders, which if broken decisively will set the stage for further losses. Some follow-through selling below the overnight swing low, around the 1.2470 region, will reaffirm the negative bias and make the GBP/USD pair vulnerable to retesting the 1.2400 mark. The next relevant support is pegged near the 1.2330 area ahead of the 1.2300 mark before the pair eventually drops to the 1.2265-1.2260 zone.

On the flip side, the 1.2600 mark might continue to act as immediate strong resistance. This is followed by the 1.2640 supply zone, above which the GBP/USD pair seems all set to aim back to reclaim the 1.2700 round figure. The upward trajectory could further get extended towards the 1.2770 hurdle.