GBP/USD drops to 1.2075-70 area, erodes a part of Tuesday’s upbeat UK PMI-inspired gains

• GBP/USD comes under some selling pressure on Tuesday and snaps a three-day winning streak.
• Hawkish Fed expectations, looming recession risks underpin the USD and weigh on the major.
• Bets for additional rate hikes by the BoE could help limit losses ahead of the FOMC minutes.

The GBP/USD pair comes under some selling pressure following an early uptick to the 1.2135 region and drops to a fresh daily low during the first half of the European session. Spot prices currently trade around the 1.2080-1.2075 region, down nearly 0.30% for the day, and for now, seem to have snapped a three-day winning streak.

The US Dollar (USD) remains pinned near a six-week top amid expectations for further policy tightening by the Federal Reserve (Fed) and turns out to be a key factor weighing on the GBP/USD pair. In fact, the markets are now pricing in at least a 25 bps lift-off at each of the next two FOMC policy meetings in March and May. The bets were lifted by strong US PMI prints on Tuesday, which showed that business activity unexpectedly rebounded to an eight-month high in February.

This comes on the back of the incoming positive US macro data, which pointed to an economy that remains resilient despite rising borrowing costs. Moreover, several FOMC officials, including Fed Chair Jerome Powell, recently stressed the need to keep raising rates gradually to fully gain control of inflation. This remains supportive of elevated US Treasury bond yields, which, along with looming recession risks and geopolitical tensions, continue to underpin the safe-haven buck.

Hence, the market focus will remain glued to the release of the minutes from the latest FOMC monetary policy meeting. Investors will look for fresh clues about the Fed's rate-hike path, which will play a key role in influencing the near-term USD price dynamics and provide a fresh directional impetus to the GBP/USD pair. In the meantime, rising bets for additional interest rate hikes by the Bank of England (BoE) should lend support to the British Pound and help limit losses.

The UK PMIs released on Tuesday indicated that business activity rose more than expected in February and fueled optimism that the country may be able to avoid a steep economic downturn. This makes it prudent to wait for strong follow-through selling before confirming that the GBP/USD pair's recent recovery move from a technically significant 200-day SMA has run out of steam.

Technical levels to watch