GBP/USD extends post-UK CPI decline, flirts with 1.2400 mark amid modest USD strength

• GBP/USD witnessed aggressive selling on Wednesday and snapped a three-day winning streak.
• The latest UK CPI report fueled stagflation fears and weighed heavily on the British pound.
• The emergence of some USD dip-buying further contributed to the intraday selling bias.

The GBP/USD pair added to its heavy intraday losses and dropped to a fresh daily low, below the 1.2400 mark during the early part of the European session. 

Having failed to conquer the 1.2500 psychological mark, the GBP/USD pair witnessed aggressive selling on Wednesday and snapped a three-day winning streak to a two-week high. The British pound weakened across the board after data released from the UK showed that the headline CPI soared to a 40-year high level of 9% in April. Given that the UK economic activity had slowed sharply during the first quarter, the data further fueled stagflation fears. Apart from this, the UK-EU impasse over the Northern Ireland protocol exerted additional downward pressure on sterling.

In the latest developments, the British government on Tuesday announced a bill that would effectively override parts of a Brexit deal. The European Commission had pledged to respond with all measures at its disposal if Britain moves ahead with a plan to rewrite the NI protocol. Investors now fear that the legislation could trigger a trade war in the middle of a surge in the cost of living, which would take its toll on the UK economy and validate the Bank of England's gloomy outlook. This, along with modest US dollar strength, contributed to the GBP/USD pair's slide.

The USD was back in demand and stalled its recent corrective slide from a two-decade high amid firming expectations for a more aggressive policy tightening by the Fed. The markets seem convinced that the US central bank would need to take more drastic action to bring inflation under control. The bets were reinforced by Fed Chair Jerome Powell's remarks at a Wall Street Journal event, saying that he will back interest rate increases until prices start falling back toward a healthy level. Apart from this, a fresh leg down in the equity markets underpinned the safe-haven buck.

With the latest leg down, the GBP/USD pair has eroded a major part of the overnight gains. That said, it will be prudent to wait for strong follow-through selling before confirming that the recent bounce from the 1.2155 region, or the lowest level since May 2020 has run its course and placing aggressive bearish bets.

Technical levels to watch