GBP/USD measures depth around 1985 levels above 1.1200 as BOE rate hike looms

GBP/USD slumped to the fresh 37-year low near 1.1220 before licking its wounds around 1.1230 early Thursday morning in Europe. In doing so, the Cable pair justifies the broad US dollar strength amid the risk-aversion while also portraying the market’s pessimism ahead of the Bank of England’s (BOE) monetary policy meeting.

While portraying the mood, the US 10-year Treasury yields bounce back towards the 11-year high marked the previous day, up three basis points (bps) near 3.55% whereas the 2-year counterpart rises 0.75% intraday to 4.085% at the latest, near the highest levels in 15 years. Also, the S&P 500 Futures refresh a two-month low of around 3,770, down 0.70% intraday by the press time.

It should be noted that the firmer yields, downbeat equities, and stock futures direct the risk-averse traders towards the US dollar. As a result, US Dollar Index (DXY) takes the bids to refresh the two-decade top as it rises to 111.65, up 0.22% intraday near 111.60 at the latest.

In doing so, the greenback’s gauge versus the six major currencies cheers the Fed’s third 0.75% rate hike and the Russia-Ukraine tension.

The US Federal Reserve (Fed) announced 75 basis points (bps) of a rate hike, the third one in a line of such kind, as it wants to tame inflation fears even at the cost of a “sustained period of below-trend growth” and a softening in the labor market. Fed Chairman Jerome Powell also signaled that the way to tame inflation isn’t painless ahead.

On the other hand, Russian President Vladimir Putin’s announcement to mobilize partial troops also reignited the Ukraine-linked geopolitical fears and the supply-crunch woes. In a reaction, Ukrainian President Volodymyr Zelensky said Ukrainian neutrality is out of the question and he rules out that a settlement can happen on a different basis than the Ukrainian peace formula. On the same line were the comments from the Group of Seven (G7) leaders who confirmed cooperation on support for Ukraine.

At home, the UK government’s fresh relief plan surrounding the limits on the energy bill and aid to the British business fails to convince the Cable buyers. Also exerting downside pressure on the GBP/USD prices could be the fears of harsh Brexit as UK PM Liz Truss is a firm opponent of the European Union (EU) laws.

In summary, GBP/USD bears are all in to challenge the 1.0000 psychological magnet on the BOE’s 0.50% rate hike. Meanwhile, a surprise move of the 75 basis points (bps) by the “Old Lady”, as it is popularly known, may not impress the cable bulls except for a short-term rebound amid the broad risk-aversion and comparatively better status of the US versus the UK.

Also read: BOE Interest Rate Decision Preview: GBP/USD braces for volatility storm, eyeing a 75 bps hike

Technical analysis

Unless bouncing back beyond the four-month-old previous support line, around 1.1290 by the press time, GBP/USD is vulnerable to testing the 78.6% Fibonacci Expansion (FE) level of the pair’s moves between August 17 and September 13, near 1.1160.