GBP/USD struggles below 1.1600 mark, remains vulnerable near 2-½ year low

• GBP/USD remains depressed for the fifth straight day and drops to a two-and-half-year low.
• A bleak outlook for the UK economy continues to weigh on sterling and act as a headwind.
• Aggressive Fed rate hike bets, a weaker risk tone benefits the USD and contributes to the slide.

The GBP/USD pair recovers a few pips from a two-and-half-year low touched earlier this Thursday, albeit seems struggling to capitalize on the move. The pair remains on the defensive through the first half of the European session and is currently placed just below the 1.1600 round-figure mark.

The British pound continues with its relative underperformance amid the deteriorating outlook for the UK economy and political uncertainty. Market participants seem concerned that if Liz Truss was named as the next UK Prime Minister, her government’s policies would diverge from the Bank of England. This, to a larger extent, overshadows bets for a 75 bps rate hike by the BoE in September. This, along with the underlying bullish tone surrounding the US dollar, drags the GBP/USD pair lower for the fifth successive day.

The greenback remains well supported by firming expectations that the Fed will stick to its aggressive policy tightening path to curb stubbornly high inflation. In fact, the markets have priced in a supersized 75 bps rate hike at the September FOMC meeting and the bets were reaffirmed by the recent hawkish comments by several Fed officials. This, in turn, pushes the yield on the 2-year US government bond, which is highly sensitive to rate hike expectations, to a 15-year high and continues to underpin the greenback.

Apart from this, the prevalent risk-off environment - as depicted by a weaker trading sentiment around the equity markets - is offering additional support to the safe-haven buck. Investors remain concerned about a deeper global economic downturn and the fears were further fueled by Thursday's disappointing Chinese Manufacturing PMI for August. Adding to this, headwinds stemming from fresh COVID-19 lockdowns in China temper investors' appetite for riskier assets and seem to benefit traditional safe-haven assets.

The fundamental backdrop suggests that the path of least resistance for the GBP/USD pair is to the downside amid absent relevant market-moving macro data from the UK. Later during the early North American session, traders might take cues from the US economic docket - featuring Weekly Initial Jobless Claims and the ISM Manufacturing PMI. This, along with the US bond yields and the broader risk sentiment, might influence the USD and provide some impetus to the GBP/USD pair ahead of the US jobs report (NFP) on Friday.

Technical levels to watch