GBP/USD faces barricades around 1.1250 as hawkish Fed bets soar

The GBP/USD pair has picked offers in the Tokyo session as the risk-on mood has started fading. The kick-start of the US quarterly earnings season delivered a rebound move in S&P500 on Monday after a bearish Friday but has eased some gains now.

The US dollar index (DXY) has attempted a rebound after dropping below the critical support of 113.00. While the 10-year US Treasury yields are displaying a subdued performance. Robust bets for a 75 basis point (bps) interest rate hike by the Federal Reserve (Fed) have defended the downside bias for yields till now. According to the CME FedWatch tool, the chances for a 75 bps rate hike have climbed to 99.4%.

Meanwhile, political dram in the UK Prime Minister Liz Truss sacked Chancellor Kwasi Kwarteng last week has triggered political instability in the sterling region. Planning for cancellation of the proposed increase in corporate taxes to 25% from 2023 seems responsible for the removal of the UK Finance minister Kwarteng from his post.

Earlier, the move to freeze the corporate taxes at 19% resulted in a sell-off in the UK bond market. UK equity markets picked significant offers and returns on government bonds soared. This forced the Bank of England (BOE) to intervene and announce a bond-buying program to support gilt-exposed pension funds.  

The pound bulls could face volatility as Goldman Sachs expected a bleak economic outlook for the UK. The bank stated that “Folding in weaker growth momentum, significantly tighter financial conditions, and the higher corporation tax from next April, we downgrade our UK growth outlook further and now expect a more significant recession." Also, the bank sees a contraction in the UK’s Gross Domestic Product (GDP) for 2023 by 1%, lower than the prior forecast of a contraction of 0.4%.