GBP/USD bears step in as the US dollar picks up a safe haven bid

• GBP/USD is under pressure at the start of the week.
• The US dollar picks up a safe haven bid over US/Sino tensions. 

GBP/USD is down on the day falling some 0.6% from a high of 1.2279 meeting a low of 1.2166 the low. The US dollar has been stronger against its major trading partners early Tuesday, apart from a further decline against the yen, in the midst of renewed Sino-US tensions over Taiwan. 

Federal Reserve officials are also emerging from the pre-Fed meeting blackout period with traders on the lookout for clues about the Fed's plans after a second straight 75 basis point rate increase last week. Evans, Mester, and Bullard spoke today.  Harker, Barkin, and Kashkari will speak tomorrow.

''Short-term we are focused on upcoming Fed speak and payrolls on Friday,'' analysts at TD Securities said. ''We see hawkish risks to the both which could help stabilize the USD. Tensions between US and China are likely to intensify given Pelosi's intended visit to Taiwan and the risk of an accident are likely underappreciated by markets, so we would tread cautiously on higher beta and equity-linked currencies.''

Meanwhile, the greenback has attracted a safe haven bid on worries a visit by US House of Representatives Speaker Nancy Pelosi to Taiwan would further harm relations between China and the United States. China has threatened repercussions if Pelosi visited the self-ruled island, which Beijing claims as its territory. The US said on Monday it would not be intimidated by China. Consequently, US long-term Treasury yields dropped to a four-month low while the US dollar gained against a basket of currencies. 

Domestically, doused in political and economic woes, the pound has been one of the laggards this year despite the Bank of England being out of the traps with policy tightening relatively early. 

Additionally, net short GBP positions edged lower for a second week with the market expecting more rate rises in the offing if Truss becomes the next UK PM in view of her tax-cutting agenda.

The latest YouGov / Times Tory members poll shows a 34 point lead for Truss:

• 60% Truss
• 26% Sunak

Nevertheless, the poor outlook for growth in the UK remains a significant concern for speculators.

''GBP has been trading under a cloud of negative sentiment for large swaths of this year,'' analysts at Rabobank noted. ''It was notable in May that the BoE’s (as expected) rate hike failed to stop the pound from falling as the market latched on to the Bank’s downside growth revision.''

''Around this time the OECD forecast that the UK would see no growth in 2023, a little worse than our house forecast of 0.2%.  The BoE, like most other central banks, is committed to reigning in inflation, even at the cost of growth. However, the absence of the latter has provided a strong headwind for the pound.''