GBP/USD drops back towards two-year low as sellers attack 1.2300, focus on Brexit, UK GDP

• GBP/USD fades Friday’s bounce off multi-day low, renews intraday bottom of late.
• Sinn Fein’s victory in NI election renews Brexit fears, UK’s Truss threatens to suspend Brexit deal.
• Headlines concerning China’s covid, G7 sanctions on Russia add to the risk-off mood, which in turn underpins USD demand.
• Risk catalysts to entertain bears ahead of Thursday’s key data.

GBP/USD takes offers to renew intraday low around 1.2300, fading the previous day’s bounce off a two-year low during Monday’s Asian session. The cable pair’s latest weakness could be linked to the broad risk-off mood, as well as negative headlines concerning Brexit. Also weighing on the pair could be the anxiety ahead of this week’s key UK Q1 GDP.

Starting with the risk profile, an over 1.0% fall in the S&P 500 Futures joins a three-year high of the US 10-year Treasury yields to portray the sour sentiment in the markets. While checking the moves, the risk of tighter monetary policy and China’s covid, as well as the Western sanctions on Russia, gain major attention. Also weighing on the GBP/USD prices are recent challenges to Brexit, mainly due to Sinn Fein’s victory in the Northern Ireland (NI) elections.

The hopes of faster, as well as heavier, rate hikes remain firmer ahead of this week’s key US inflation data. The reason could be linked to the absence of softer US jobs reports, as well as mostly hawkish comments from the Fed policymakers.

The US Nonfarm Payrolls (NFP) reprinted the 428K figures, if compared to the revised figures for March, by surpassing the 391K forecasts. On the same line, the Unemployment Rate also remained intact at 3.6%.

Following the data, Minneapolis Fed President and FOMC member Neel Kashkari said in a blog post on Medium, “Given that long-term real rates have the greatest influence on the demand for credit, financial conditions are already nearly back to neutral levels.”  The policymaker also said his assessment of the nominal neutral rate of interest is still that it is around 2.0%. It’s worth noting that the President of the Federal Reserve Bank of St. Louis James Bullard reiterated his bullish bias and pushed the Fed towards a 3.5% rate.

On a different page, G7 nations met during the weekend and announced further sanctions on Russian oil, as well as services. “After meeting virtually with Ukrainian President Volodymyr Zelensky, the leaders said they would cut off key services on which Russia depends, reinforcing the isolation of Russia "across all sectors of its economy,” said Reuters. Also portraying the risk-off mood was news from China as Shanghai announced fresh activity restriction measures due to the worsening covid conditions.

Furthermore, Sinn Fein’s status as the biggest party of Northern Ireland (NI), after the latest victory in Ireland assembly elections, renewed fears of Ireland’s reunification with Europe. While sensing the same, UK Minister Lizz Truss threatens the bloc to dump the Brexit deal if it doesn’t change the NI protocol. UK PM Boris Johnson will give a speech on Tuesday wherein he “is promising to deliver a “super seven” of Brexit Bills which will cut red tape and “unnecessary barriers inherited from the EU”, per Independent.

Moving on, the risk catalysts may keep the GBP/USD prices pressured amid firmer USD but Thursday’s preliminary UK GDP for Q1 2022 will be crucial amid fears of economic stagflation.

Read: GBP/USD Weekly Forecast: The worst seems far from over, focus shifts to US inflation, UK GDP

Technical analysis

Friday’s Dragonfly Doji, oversold RSI conditions challenge GBP/USD bears of late. While the latest swing low and June 2020 bottom, respectively around 1.2275 and 1.2250, restrict the short-term downside of the cable pair, corrective pullback needs validation from April’s low of 1.2411 to gain traction.