GBP/USD Analysis: Not out of the woods yet, Powell’s testimony eyed for fresh impetus

• A combination of factors prompted some fresh selling around GBP/USD on Tuesday.
• Brexit/COVID-19 jitters acted as a headwind for the GBP amid a modest USD strength.
• Tuesday’s key focus will be on the Fed Chair Jerome Powell’s congressional testimony.

The GBP/USD pair struggled to capitalize on the previous day's solid rebound of nearly 150 pips from two-month lows and faced rejection near 100-day SMA on Tuesday. The momentum dragged the pair back below the 1.3900 mark during the early European session and was sponsored by a combination of factors. The UK government's decision to delay the final stage of easing lockdown measures – amid a surge in COVID-19 cases infected by the so-called Delta variant – dampen prospects for a rapid UK economic recovery from the pandemic.

Adding to this, concerns about the EU-UK stand-off on the Northern Ireland protocol acted as a headwind for the British pound. In the latest developments, Maros Sefcovic, a European Commission vice-president, warned in a speech on Friday that a downward spiral in relations could ensue if Britain continues with unilateral action. Separately, British Brexit minister David Frost said that time is now very pressing if we are to find solutions together. This, along with renewed US dollar buying, prompted fresh selling around the major.

Following a modest pullback on Monday, the USD was back in demand and remained well supported by the Fed's sudden hawkish turn last week. It is worth recalling that the Fed surprised investors at the end of June policy meeting and brought forward its timetable for the first post-pandemic interest rate hikes. The so-called dot plot pointed to two rate hikes by the end of 2023 as against policymakers projection for no increase until 2024 in the March meeting. The USD also benefitted from an uptick in the US bond yields and a softer risk tone.

St. Louis Fed President James Bullard said on Monday that the Fed should be prepared for inflation to surprise on the high end through next year. Moreover, the Fed Chair Jerome Powell – in prepared testimony for the congressional hearing – also highlighted rising inflation pressures. This, in turn, pushed the yield on the benchmark 10-year US government bond back above the 1.50% threshold. Traders further took cues from a generally negative tone around the equity markets, which tends to benefit the greenback's relative safe-haven status.

Market participants now look forward to the US economic docket – featuring the second-tier releases of Existing Home Sales and Richmond Manufacturing Index. Apart from this, the broader market risk and the US bond yields will influence the USD price dynamics. That said, the key focus will remain on the Fed Chair Jerome Powell's testimony before the House Select Subcommittee on the Coronavirus Crisis. Powell's remarks might infuse some volatility in the markets and produce some meaningful trading opportunities around the major.

Short-term technical outlook

From a technical perspective, the pair last week broke through a near one-year-old ascending trend-line support. A subsequent fall and acceptance below 100-day SMA favour bearish traders. The negative outlook is reinforced by the emergence of some fresh selling on Tuesday and supports prospects for a further near-term depreciating move. Hence, a subsequent downfall back towards retesting the overnight swing lows, around the 1.3785 region, remains a distinct possibility. That said, investors might refrain from placing any aggressive bearish bets ahead of the BoE monetary policy meeting on Thursday. This, in turn, should help limit any deeper losses, at least for the time being.

On the flip side, momentum back above the 1.3900 mark might continue to confront resistance near the 1.3935 region (100-day SMA). Any further move up would be seen as a selling opportunity and fizzle out rather quickly near the mentioned trend-line support breakpoint, currently near the key 1.4000 psychological mark.