GBP/USD recovers further from two-week low, rallies to mid-1.3100s amid weaker USD

• GBP/USD staged a goodish rebound from a near two-week low touched earlier this Tuesday.
• The risk-on impulse weighed heavily on the safe-haven USD and extended support to the pair.
• Hawkish Fed expectations, elevated US bond yields could limit USD losses and cap spot prices.

The intraday USD selling picked up pace during the mid-European session and pushed the GBP/USD pair to a fresh daily top, around mid-1.3100s in the last hour.

The pair witnessed an intraday short-covering move and rallied around 100 pips from the 1.3050 area, or a near two-week low touched earlier this Tuesday amid a broad-based US dollar weakness. The incoming geopolitical headlines lifted hopes for a diplomatic solution to end the war in Ukraine and boosted investors' confidence.

In fact, the Russian Defense Ministry said that it would scale down military activity in Kyiv and Chernihiv in order to create conditions for dialogue. Adding to this, a Ukrainian negotiator noted that there have been enough developments to hold a meeting between Ukrainian President Volodymyr Zelenskyy and Russian President Vladimir Putin.

The latest developments triggered a risk-on rally in the global equity markets, which, in turn, weighed heavily on the safe-haven buck and was seen as a key factor behind the GBP/USD pair's strong rebound. That said, the fact that the Bank of England had softened its language on the need for further rate hikes acted as a headwind for sterling.

Conversely, the markets have been pricing in a more aggressive policy response by the Fed and a 50 bps rate hike move at the next two meetings. This was reinforced by elevated US Treasury bond yields, with the benchmark 10-year note holding above 2.5%, or a nearly three-year high, which should limit the USD losses and further contribute to capping the GBP/USD pair.

Even from a technical perspective, the recent weakness below an ascending trend channel marked a bearish flag breakdown and favours bearish traders. Hence, it will be prudent to wait for some follow-through buying before confirming that the GBP/USD pair has bottomed out and positioning for any further near-term appreciating move.

Market participants now look to the US economic docket, featuring the release of JOLTS Job Openings and the Conference Board's Consumer Confidence Index. The focus, however, will remain on fresh developments surrounding the Russia-Ukraine saga. This, along with the US bond yields, will influence the USD and provide some impetus to the GBP/USD pair.

Technical levels to watch