GBP/USD drops to 1.2200 area, fresh four-week low amid recession fears/stronger USD

• GBP/USD witnessed heavy selling for the fourth straight day and dropped to a fresh multi-week low.
• The UK political jitters, Brexit woes and disappointing UK macro data weighed on the British pound.
• Aggressive Fed rate hike bets, the risk-off mood underpinned the USD and added to the selling bias.

The GBP/USD pair extended last week's rejection slide from the 1.2600 neighbourhood and witnessed heavy selling for the fourth successive day on Monday. The downward trajectory extended through the first half of the European session and dragged spot prices to the 1.2200 neighbourhood, or a fresh four-week low in the last hour.

The British pound was undermined by the uncertainty over Boris Johnson’s future as the UK Prime Minister and Brexit woes. In fact, the UK Foreign Secretary is up for presenting a bill that would effectively override parts of a Brexit deal related to the Northern Ireland Protocol. The European Commission had pledged to respond with all measures at its disposal if Britain moves ahead with a plan to rewrite the Brexit deal. Hence, the legislation could spark a trade war in the middle of the cost-of-living crisis, which could make it difficult for the Bank of England to hike interest rates any further.

The market fears were further fueled by disappointing UK macro data released earlier this Monday. The official figures showed that the economy unexpectedly contracted by 0.3% in April, marking the first 
back-to-back decline since the start of the coronavirus pandemic. Adding to this, the UK Industrial and Manufacturing Production also recorded an unexpected fall in April. The data revealed the impact of surging prices on household spending and business activity, fueling recession fears. Apart from this, broad-based US dollar strength was seen as another factor that contributed to the GBP/USD pair's ongoing decline.

The latest US consumer inflation figures released on Friday reaffirmed bets that the Federal Reserve will tighten its monetary policy at a faster pace to cool price pressures. The prospects for a more aggressive Fed remained supportive of elevated US Treasury bond yields. This, along with the worsening global economic outlook and the prevalent risk-off mood, provided an additional boost to the safe-haven greenback. The fundamental backdrop supports prospects for a further near-term depreciating move for the GBP/USD pair, though traders might refrain from fresh bearish bets ahead of this week's FOMC/BOE policy meetings.

Technical levels to watch