GBP/USD drops to fresh multi-month low amid sustained USD buying, ahead of BoE decision

• GBP/USD drifts lower for the second straight day and touches a fresh multi-month low.
• The Fed's hawkish pause continues to underpin the USD and exerts pressure on the pair.
• Expectations for a pause in the BoE's rate-hiking cycle also contribute to the offered tone.

The GBP/USD pair remains under some selling pressure for the second successive day on Thursday and drops closer to the 1.2300 round figure, or a fresh low since early June during the Asian session.

The US Dollar (USD) manages to preserve the previous day's post-FOMC recovery gains from over a one-week low and remains well within the striking distance of a six-month high, which, in turn, is seen exerting pressure on the GBP/USD pair. As was widely anticipated, the Federal Reserve (Fed) decided to leave interest rates unchanged, though maintained its forecast for rates to peak at 5.5% to 5.75% this year, keeping the door open for one more 25 bps lift-off in 2023. Moreover, policymakers now see the benchmark rate at 5.1% next year, suggesting just two rate cuts in 2024 as compared to four rate cuts projected previously.

The higher-for-longer narrative keeps the US Treasury bond yields elevated, which, along with a softer risk tone, continues to underpin the safe-haven Greenback. In fact, the yield on the two-year US government bond shot to a 17-year and the benchmark 10-year Treasury note touched its highest since late 2007. This, in turn, fuels worries about economic headwinds stemming from rapidly rising borrowing costs and tempers investors' appetite for riskier assets. Apart from this, expectations for an imminent pause in the Bank of England's (BoE) rate-hiking cycle continue to weigh on the British Pound and drag the GBP/USD pair.

Market pricing swung drastically after data released from the UK on Wednesday showed that the annual headline CPI fell to 6.7% in August from 6.8% in July, defying consensus forecast for a rise to 7%. Moreover, importantly the core CPI – excluding volatile food, energy, alcohol and tobacco prices – came in at 6.2% in the 12 months to the end of August, down from 6.9% in July. This comes on top of reviving recession fears and signs that the UK labour market is cooling, reaffirming market expectations. Hence, the focus will remain glued to the highly-anticipated BoE policy decision, scheduled to be announced later this Thursday.

Later during the early North American session, traders will take cues from the US economic docket – featuring the usual Initial Weekly Jobless Claims, Philly Fed Manufacturing Index and Existing Home Sales data. This, along with the US bond yields and the broader risk sentiment, might influence the USD price dynamics and provide some impetus to the GBP/USD pair. Nevertheless, the aforementioned fundamental backdrop seems tilted in favour of bearish traders and suggests that the path of least resistance for spot prices remains to the downside. Hence, any attempted recovery might get sold into and is more likely to remain capped.

Technical levels to watch