GBP/USD bounces off multi-day low, still in the red below 1.3600 amid modest USD strength

• GBP/USD extended the overnight pullback and edged lower on Tuesday amid stronger USD.
• Russia-Ukraine conflict dented the risk sentiment and benefitted the safe-haven greenback.
• Rising bets for more BoE rate hikes acted as a tailwind for the GBP and helped limit losses.

The GBP/USD pair recovered a few pips from the multi-day low touched during the first half of the European session and was last seen trading around the 1.3580 area, down nearly 0.15% for the day.

The pair extended the previous day's modest pullback from the vicinity of the monthly high, around the 1.3640 area and witnessed some follow-through selling on Tuesday. A further escalation in tensions between Russia and Ukraine triggered a fresh wave of the global risk-aversion trade. This drove some haven flows towards the US dollar and turned out to be a key factor that exerted downward pressure on the GBP/USD pair.

Russian President Vladimir Putin upped the ante on Monday and formally recognised two breakaway regions – Donetsk and Luhansk – in eastern Ukraine as independent entities. Putin later ordered troops to enter the area to maintain peace and fueled fears about a full-blown East-West conflict. This was seen as a key factor that took its toll on the global risk sentiment and led to a steep decline in the equity markets.

Meanwhile, the latest geopolitical developments forced investors to scale back their expectations for a more aggressive policy response by the Fed to combat stubbornly high inflation. This, along with the anti-risk flow, dragged the US Treasury bond yields lower and capped gains for the USD. Apart from this, rising bets for additional rate hikes by the Bank of England helped limit the downside for the GBP/USD pair.

Hence, it will be prudent to wait for strong follow-through selling before positioning for any further decline amid absent relevant market moving economic releases from the UK. Later during the early North American session, traders might take cues from the US flash PMI prints. The focus, however, will remain on the situation in Ukraine, which will influence the USD and provide some trading impetus to the GBP/USD pair.

Technical levels to watch