- GBP/USD met with a fresh supply on Wednesday and dropped to its lowest level since March 2020.
- The UK political drama, Brexit woes, expectations of a less hawkish BoE weighed on the British pound.
- Strong follow-through USD buying further contributed to the selling bias ahead of the FOMC minutes.
The GBP/USD pair struggled to capitalize on its early modest gains and attracted fresh selling in the vicinity of the 1.2000 psychological mark on Wednesday. The intraday decline dragged spot prices back below the 1.1900 mark, to the lowest level since March 2020 and was sponsored by a combination of factors.
The British pound was undermined by the UK political crisis, where British Prime Minister Boris Johnson faces mounting pressure to step down following the resignations of key Tory MPs. This comes amid worries that the UK government's controversial Northern Ireland Protocol Bill could trigger a trade war with the European Union. Apart from this, expectations that the Bank of England would adopt a gradual approach towards raising interest rates amid growing recession fears further weighed on sterling.
On the other hand, the US dollar built on the previous day's blowout and surged to a fresh two-decade high amid growing acceptance that the Fed would hike interest rates at a faster pace. In fact, Fed Chair Jerome Powell reiterated last week that the US central bank remains focused on getting inflation under control and that the US economy is well-positioned to handle tighter policy. This was seen as another factor that exerted downward pressure on the GBP/USD pair, though the downtick lacked strong follow-through selling.
Traders now seem to have moved to the sidelines and prefer to wait for the FOMC meeting minutes, due later during the US session. Market participants will look for fresh clues about the Fed's policy tightening path, which will influence the USD price dynamics and provide some impetus to the GBP/USD pair. In the meantime, traders will take cues from the US economic docket – featuring JOLTS Job Openings and ISM Services PMI.