GBP/USD drops to fresh daily low, below mid-1.2000s amid aggressive USD buying

• GBP/USD witnessed fresh selling on Tuesday and was pressured by a combination of factors.
• Aggressive Fed rate hike bets and recession fears lifted the safe-haven USD to a 20-year peak.
• Brexit woes, expectations for a cautious BoE weighed on the GBP and contributed to the fall.

The GBP/USD pair came under some renewed selling pressure during the early European session on Tuesday and dived to a two-day low, just below mid-1.2000s in the last hour.

Following the overnight brief pause, the US dollar caught aggressive bids and rallied to a fresh 20-year peak amid the prospects for more aggressive rate hikes by the Fed. The bets were reaffirmed by Fed Chair Jerome Powell's remarks last week, saying that the US economy is well-positioned to handle tighter policy. Apart from this, a turnaround in the global risk sentiment provided an additional boost to the safe-haven greenback, which, in turn, exerted some downward pressure on the GBP/USD pair.

The latest optimism over reports that US president Joe Biden was leaning toward a decision on easing tariffs on goods from China fizzled out rather quickly amid the worsening economic outlook. Investors remain concerned that rapidly rising interest rates and tightening financial conditions would pose challenges to global economic growth. This, along with the ongoing Russia-Ukraine war and the COVID-19 outbreak in China, has been fueling recession fears and continued weighing on investors' sentiment.

The British pound was further pressured by concerns that the UK government's controversial Northern Ireland Protocol Bill could trigger a trade war with the European Union amid the cost of living crisis. Apart from this, expectations that the Bank of England would adopt a gradual approach toward raising interest rates should act as a headwind for sterling. The fundamental backdrop supports prospects for a further depreciating move for the GBP/USD pair and a slide back towards challenging the YTD low.

Market participants now look forward to the release of the BoE's Financial Stability Report. This will be followed by BoE Governor Andrew Bailey's press conference, which will influence the GBP price dynamics and provide some impetus to the GBP/USD pair. Traders will further take cues from the broader market risk sentiment and the USD price dynamics to grab short-term opportunities around the major.

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