GBP/USD drops to its lowest level since July 2020 as the USD buying remains unabated

The GBP/USD pair edged lower through the first half of the European session and slipped below the mid-1.2500s, or its lowest level since July 2020 in the last hour.

The US dollar prolonged its recent strong bullish momentum and climbed to a fresh two-year high on Wednesday amid rising bets for a more aggressive policy tightening by the Fed. Investors now expect the US central bank to hike interest rates by 50 bps at each of its next four meetings in May, June, July and September. Apart from this, the deteriorating global economic outlook boosted the greenback's status as the reserve currency. This, in turn, was seen as a key factor that exerted downward pressure on the GBP/USD pair for the fifth successive day.

The ongoing Russia-Ukraine crisis, a potential EU embargo on Russian oil imports, the latest COVID-19 outbreak in China and finally, soaring inflation have been fueling fears of stalling global growth. Poland and Bulgaria - the two NATO and EU members - said that Russia will stop supplying gas on Wednesday. The development raised fears that Russia could follow through on its threat to halt gas flows to countries that refuse to pay for fuel in roubles and cut off supplies to Europe, which would impact the region's economic growth.

Adding to this, prolonged COVID-19 lockdowns in China further dampened the market mood. The fundamental backdrop favours the USD bulls and supports prospects for a further near-term depreciating move for the GBP/USD pair. The negative outlook is reinforced by diminishing odds of future interest rate hikes by the Bank of England, especially after the recent data indicated that the UK economy is under stress from the soaring cost of living. That said, slightly oversold conditions on short-term charts warrant caution for aggressive traders.

There isn't any major market-moving economic data due for release from the UK, leaving the GBP/USD pair at the mercy of the USD price dynamics. Later during the early North American session, traders will take cues from second-tier US macro data. This, along with Fed rate hike expectations and the broader market risk sentiment, will influence the USD price dynamics and produce some trading opportunities around the GBP/USD pair.

Technical levels to watch