GBP/USD remains on the defensive near three-week low, just above mid-1.3000s

• GBP/USD witnessed some follow-through selling on Wednesday amid broad-based USD strength.
• The Fed’s hawkish outlook, elevated US bond yields, the Ukraine crisis benefitted the greenback.
• The technical setup supports prospects for a slide towards the YTD low, around the 1.3000 mark.

The GBP/USD pair remained on the defensive through the early European session and was last seen trading just a few pips above the three-week low, around the 1.3055 region.

The pair witnessed some selling during the first half of the trading on Wednesday and dropped to the lowest level since March 16, though showed resilience below the mid-1.3000s. The US dollar gained traction for the fifth successive day and shot to a nearly two-year peak, which, in turn, exerted some downward pressure on the GBP/USD pair.

The markets seem convinced that the Fed would hike interest rates by 100 bps over the next two meetings to combat stubbornly high inflation. Moreover, Fed Governor Lael Brainard said on Tuesday that the US central bank could start reducing its balance sheet at a rapid pace as soon as the May meeting and provided a goodish lift to the buck.

Expectations for a more aggressive Fed pushed the yield on the 2-year US government bond, which is highly sensitive to rate hike expectations, to its highest level since January 2019. Moreover, the yields on the 5-year and the benchmark 10-year bonds jumped to their highest since December 2018 and April 2019, respectively.

Hence, the market focus will remain glued to the FOMC monetary policy meeting minutes, due for release later during the US session. In the meantime, fading hopes for a diplomatic solution to end the war in Ukraine and concerns about more Western sanctions on Russia over its alleged war crimes should benefit the safe-haven greenback.

The fundamental backdrop seems tilted in favour of bearish traders and supports prospects for a further near-term depreciating move for the GBP/USD pair. With technical indicators still far from being in the oversold zone, spot prices seem vulnerable to sliding back to challenge the YTD low, around the 1.3000 psychological mark.

Technical levels to watch