- GBP/USD edged lower for the second successive day amid strong follow-through USD buying.
- Rising US bond yields and the worsening global economic outlook underpinned the greenback.
- Looming recession fears weighed on the British pound and contributed to the intraday selling.
The GBP/USD pair struggled to capitalize on the previous day's late rebound from the 1.2560 area and came under some renewed selling pressure on Wednesday. This marked the second successive day of a negative move and was sponsored by sustained US dollar buying.
The US dollar gained some follow-through traction and recovered further from over a one-month low amid rising US Treasury bond yields, bolstered by Fed Governor Christopher Waller's hawkish remarks. Speaking at an event in Frankfurt, Waller backed a 50 bps rate hike for several meetings until inflation eases back toward the central bank’s goal. This, in turn, pushed the yield on the benchmark 10-year US government bond to a nearly two-week high, which, along with the worsening outlook for the global economy acted as a tailwind for the safe-haven buck.
The markets now seem sceptical that central banks can hike interest rates to curb inflation without impacting economic growth. This, along with concerns that the global supply chain disruption would push consumer prices even higher, continued weighing on investors' sentiment. Meanwhile, worries about the cost of living crisis, which the Bank of England cautioned could push the UK into recession later this year, weighed on the British pound. Furthermore, the UK-EU impasse over the Northern Ireland protocol supports prospects for further losses for the GBP/USD pair.
Furthermore, the British government's legislation – that would effectively override parts of a Brexit deal – has raised fears about a trade war. This, along with expectations that a jumbo rate hike by the BoE would take its toll on the UK economy, adds to the grim outlook for sterling. The fundamental backdrop seems tilted firmly in favour of bearish traders, suggesting that any attempted recovery move could still be seen as a selling opportunity. Traders now look forward to the US macro data – ISM Manufacturing PMI and JOLTS Job Openings – for some impetus.