GBP/USD bounces off low, still deep in the red amid anxiety over UK’s economic plans

The GBP/USD pair plunges nearly 300 pips from the daily high and slips below mid-1.0500s heading into the North American session on Wednesday, though lacks follow-through. The pair is currently placed just below the 1.0600 round-figure mark, still down over 1.25% for the day.

The British pound did get a minor lift after the Bank of England announced that it will start buying long-dated UK government bonds to help restore orderly market conditions. The UK central bank's intervention appeared to calm the market, sending the yield on the 30-year benchmark gilt down by more than 50 bps at one point. The initial market reaction, however, faded rather quickly, which is evident from the GBP/USD pair's dramatic intraday turnaround from the 1.0840 region.

The new UK government's historic tax cuts worth £45 billion, along with plans to subsidize energy bills, could stretch Britain's finances to their limits. Investors seem less confident about the government’s ability to manage the ballooning debt. Furthermore, the fiscal package threatens to derail the BoE's efforts to contain sky-high inflation and create additional economic headwinds. This, in turn, acts as a headwind for sterling and caps the upside for the GBP/USD pair.

The US dollar, on the other hand, hits a fresh two-decade high and continues to draw support from growing acceptance that the Fed will hike interest rates at a faster pace to tame inflation. The bets were reaffirmed by the overnight hawkish remarks by FOMC members. Apart from this, the prevalent risk-off environment - amid worries about a deeper global economic downturn - provides an additional lift to the safe-haven buck and contributes to the GBP/USD pair's sharp intraday downfall.

That said, a modest pullback in the US Treasury bond yields is holding back the USD bulls from placing fresh bets and lending some support to the GBP/USD pair. The fundamental backdrop, however, suggests that the path of least resistance for spot prices is to the downside. That said, sustained strength beyond the 1.0840 region, which now seems to have emerged as an immediate strong barrier, will negate the near-term bearish outlook and trigger an aggressive short-covering move.

Technical levels to watch