GBP/USD struggles to defend 1.2350 as Brexit woes join flight to safety

• GBP/USD holds lower ground after declining the most in two weeks.
• EU eyes punitive measures on UK to stop NIP alteration.
• UK inflation missed mark despite rallying to two decade high.
• Fears of inflation, growth kept markets in jittery mode, USD benefits from risk-aversion.

GBP/USD remains pressured around 1.2350, following the heaviest daily fall in a fortnight, as traders seek fresh clues during Thursday’s Asian session. Even so, downbeat headlines concerning Brexit and a broad risk-off mood keep sellers hopeful.

Following UK Prime Minister (PM) Boris Johnson’s announcements to alter part of the Northern Ireland Protocol (NIP), backed by British Foreign Minister Liz Truss’ confirmation, the European Union (EU) hesitantly braces for talks on the matter and offered olive branch. However, the bloc is also heard to prepare punishments for Britain to stop it. “The European Union is considering a targeted trade war on troublesome Brexiteer MPs and Tory ministers, sources told The Telegraph, as the bloc war-gamed its response to Boris Johnson’s plan to override the Northern Ireland Protocol,” said The UK Telegraph.

Elsewhere, higher inflation numbers from the UK, Eurozone and Canada appear to be fueling the fears of slowing growth moving forward. That said, the UK Consumer Price Index (CPI) rose to a fresh high since the 1980s despite being lesser than the 9.1% YoY forecast, with 9.0% the figure for April.

Also contributing to the risk-aversion wave and exerting downside pressure on the GBP/USD price is Shanghai’s refrain from total unlocks and an increase in covid cases in mainland China, as well as fresh virus-led activity restrictions in Tianjin, the port city near Beijing.

Against this backdrop, Wall Street benchmarks saw the red while the US 10-year Treasury yields dropped 11 basis points (bps) to 2.88% by the end of Wednesday’s North American trading session. It’s worth noting that the S&P 500 Futures drops 0.25% intraday at the latest.

Looking forward, a lack of UK data highlights second-tier US statistics and risk catalysts, mainly including updates over inflation, Brexit and covid, as the key factors to determine near-term GBP/USD moves.

Technical analysis

A U-turn from 21-DMA, around 1.2475 by the press time, joins the GBP/USD pair’s failures to hold 1.2350 to direct the quote towards a one-week-old horizontal support zone near 1.2250.