GBP/USD pares intraday losses to weekly low, keeps the red ahead of Powell’s testimony

• GBP/USD witnessed heavy selling on Wednesday and dropped to a fresh weekly low.
• Dovish BoE expectations, recession fears, Brexit woes undermined the British pound.
• A goodish pickup in the USD demand further exerted downward pressure on the pair.
• The downside seems cushioned as the focus remains on Fed Chair Powell’s testimony.

The GBP/USD pair refreshed its weekly low during the early part of the European session, albeit managing to find some support ahead of mid-1.2100s and recovering a few pips thereafter. The pair was last seen trading around the 1.2225-1.2230 region, still down nearly 0.40% for the day.

The US dollar regained positive traction amid growing market acceptance that the Fed would stick to its policy tightening path and raise interest rates at a faster pace to curb soaring inflation. In fact, the markets have been pricing in another 75 bps rate hike at the next FOMC meeting in July. This, along with a fresh wave of the global risk-aversion trade, boosted the safe-haven USD and exerted downward pressure on the GBP/USD pair.

The British pound was further weighed down by expectations that the Bank of England would adopt a more gradual approach to raising interest rates amid recession fears and the cost of living crisis. The market fears were further fueled by the latest UK consumer inflation data, showing that the headline CPI climbed to a new 40-year high of 9.1% in May. On a monthly basis, the gauge decelerated sharply from a 2.5% increase in April and rose 0.7%.

Apart from this, the UK-EU impasse over the Northern Ireland Protocol of the Brexit agreement further undermined sterling and contributed to the GBP/USD pair's intraday decline. Meanwhile, the global flight to safety triggered a modest pullback in the US Treasury bond yields and held back the USD bulls from placing aggressive bets. This, in turn, was seen as the only factor that assisted the pair to rebound around 65-70 pips from the daily low.

It, however, remains to be seen if the GBP/USD pair is able to capitalize on the intraday bounce as investors await Fed Chair Jerome Powell's testimony before the Senate Banking Committee. Market participants will look for fresh clues about the Fed's policy tightening path, which would play a key role in influencing the USD price dynamics. This, in turn, should assist traders to determine the next leg of a directional move for the GBP/USD pair.

Technical levels to watch