GBP/USD dives back closer to YTD low, around 1.2160 area amid broad-based USD strength

• GBP/USD witnessed selling for the fourth straight day and dropped back closer to the YTD low.
• Disappointing UK macro data fueled recession fears and weighed heavily on the British pound.
• Aggressive Fed rate hike bets and the risk-off mood benefitted the USD and added to the selling.

The GBP/USD pair added to its heavy intraday losses and weakened further below the 1.2200 round-figure mark heading into the North American session. The pair was last seen trading around the 1.2160-1.2165 region, just a few pips above the YTD low touched on May 12.

The monthly UK GDP report released earlier this month showed that the economy 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 slumped for the second straight month. The lacklustre macro data fuelled fears that Britain could be headed for a recession and clouded the outlook for the Bank of England. This, along with Brexit woes and UK political jitters, took its toll on the British pound.

In the latest Brexit-related developments, the UK government will publish plans to scrap parts of the post-Brexit deal concerning the Northern Ireland Protocol. This would set the stage for a further deterioration in post-Brexit UK-EU relations and possibly spark a trade war in the middle of the cost-of-living crisis. Apart from this, the uncertainty over Boris Johnson’s future as the UK Prime Minister further undermined sterling and dragged the GBP/USD pair lower for the fourth straight day amid broad-based US dollar strength.

The red-hot US consumer inflation data released on Friday fueled speculations that the Fed would tighten its policy at a faster pace and opened the door for a jumbo 75 bps rate hike. This, in turn, pushed the yield on the 2-year Treasury note - seen as a proxy for the Fed's policy rate - to 3% for the first time since 2008. Adding to this, the yield on the benchmark 10-year US government bond shot to the highest level since 2018 and underpinned the buck.

Meanwhile, the prospects for a more aggressive move by major central banks, along with the worsening global economic outlook, continued weighing heavily on investors' sentiment. This was evident from an extended selloff in the equity markets, which provided an additional boost to the greenback's relative safe-haven status. The combination of factors exerted downward pressure on the GBP/USD pair and took along short-term trading stops near the 1.2200 mark.

Some follow-through selling below the YTD low, around the 1.2155 region would be seen as a fresh trigger for bearish traders and set the stage for additional losses. That said, traders might refrain from placing aggressive bets ahead of the key central bank event risks later this week. The Fed is due to announce its policy decision on Wednesday and the BoE meeting is scheduled on Thursday. The outcome should provide a fresh directional impetus to the GBP/USD pair.

Technical levels to watch