GBP/USD flirts with daily low, just above 1.3200 mark ahead of Fed's Powell/BoE's Bailey

• GBP/USD witnessed a sharp pullback from the two-and-half-week top touched on Wednesday.
• A dovish assessment of the BoE decision last week acted as a headwind for the British pound.
• The emergence of some USD buying further contributed to the intraday slide of around 80 pips.

The GBP/USD pair edged lower through the first half of the European session and dropped to a fresh daily low, around the 1.3215 region in the last hour.

The pair witnessed an intraday turnaround from the 1.3200 neighbourhood, or a two-and-half-week high touched earlier this Wednesday and has now eroded a part of the previous day's strong gains. The fact that the Bank of England had softened its language around the need for future rate hikes at the last week's meeting turned out to be a key factor that acted as a headwind for the British pound.

This, to a larger extent, overshadowed hotter-than-expected UK consumer inflation figures and exerted some downward pressure on the GBP/USD pair amid the emergence of some US dollar buying. The headline CPI accelerated to the highest since March 1992 and came in at 6.2% YoY in February. This was above the expected rise to 5.9% from the 5.5% reported in January, though failed to impress bulls.

Conversely, the USD drew support from the recent rally in the US Treasury bond yields, bolstered by the Fed's hawkish outlook. It is worth recalling that the Fed indicated last week that it could raise rates at all the six remaining meetings in 2022. Adding to this, Fed Chair Jerome Powell suggested that the US central bank could adopt a more aggressive policy response to combat high inflation.

San Francisco Fed President Mary Daly noted that it was time to remove policy accommodation, while St. Louis Fed President James Bullard and Cleveland’s Loretta Mester called for faster hikes. The markets were quick to react and started pricing in a 50 bps rate hike at the next FOMC meeting. This, in turn, pushed the yield on the benchmark 10-year US government bond yield to the highest level since 2019.

Apart from this, the lack of progress in the Russia-Ukraine peace negotiations tempered investors' appetite for perceived riskier assets. This was evident from modest pullback in the equity markets, which further benefitted the greenback's relative safe-haven status against its British counterpart. The combination of factors contributed to the GBP/USD pair's intraday slide of around 80 pips.

Market participants now look forward to Fed Chair Jerome Powell and the BoE Governor Andrew Baily's remarks at the BIS innovation summit later today. Apart from this, traders will take cues from fresh developments surrounding the Russia-Ukraine saga. This, along with the US bond yields, will influence the USD price dynamics and produce some trading opportunities around the GBP/USD pair.

Technical levels to watch