GBP/USD flits with daily low, remains vulnerable near 1.2200 mark

• GBP/USD struggled to preserve its modest intraday gains to the 1.2300 neighbourhood.
• A gloomy outlook for the UK economy, fresh Brexit jitters acted as a headwind for sterling.
• Aggressive Fed rate hike bets, the risk-off mood underpinned the USD and exerted pressure.

The GBP/USD pair remained on the defensive through the early European session and was last seen trading near the lower end of its daily range, around the 1.2225-1.2220 region.

The pair met with a fresh supply in the vicinity of the 1.2300 mark on Monday and stalled its modest recovery from a two-year low, around the 1.2155 region touched on the last day of the previous week. The incoming UK macro data validated the gloomy outlook for the UK economy and suggested that the Bank of England's current rate hike cycle could be nearing a pause. Apart from this, reports that the UK government is expected to reveal a plan to unilaterally change the Northern Ireland protocol on Tuesday acted as a headwind for the British pound.  

On the other hand, the US dollar stood tall near a two-decade high and continued drawing support from expectations that the Fed would tighten its monetary policy at a faster pace to curb soaring inflation. In fact, markets are pricing in at least a 50 bps Fed rate hike move at the next two policy meetings. This, along with the prevalent risk-off environment, further underpinned the safe-haven buck. Investors now seem worried about softening global growth amid a more aggressive move by major central banks, the war in Ukraine and China's zero-COVID-19 policy.

A stronger greenback was seen as another factor that exerted some downward pressure on the GBP/USD pair. The fundamental backdrop seems tilted firmly in favour of bearish traders and supports prospects for an extension of the pair's recent downward trajectory. That said, absent relevant economic releases from the UK warrants some caution. Later during the early North American session, traders will take cues from the US Empire Manufacturing PMI. This, along with the broader risk sentiment, will influence the USD and provide a fresh impetus.

The focus would then shift to the monthly UK employment details on Tuesday, which will be followed by the US Retail Sales and Industrial Production figures. Investors will also scrutinize remarks by several FOMC officials, including Fed Chair Jerome Powell, for clues about the possibility of a 75 bps rate hike. This would drive the near-term USD demand and help determine the next leg of a directional move for the GBP/USD pair.

Technical levels to watch