GBP/USD pares intraday losses, keeps the red around 1.2420 area amid stronger USD

• A combination of factors prompted aggressive selling around GBP/USD on Wednesday.
• A goodish pickup in the USD demand was seen as a key factor behind the initial leg down.
• The UK CPI report fueled stagflation fears and weighed on the GBP amid fresh Brexit woes.

The GBP/USD pair trimmed a part of its heavy intraday losses and was last seen trading near the 1.2420 region, still down over 0.50% for the day during the early North American session.

The pair struggled to capitalize on its recent strong rebound from a two-year low touched last week and faced rejection near the 1.2500 psychological mark on Wednesday. The early downtick was sponsored by the emergence of some US dollar dip-buying, bolstered by expectations for a more aggressive policy tightening by the US central bank.

In fact, the markets seem convinced that the Fed would need to take more drastic action over the next few meetings to bring inflation under control. The bets were reaffirmed by Fed Chair Jerome Powell's hawkish comments on Tuesday, saying that he will back interest rate increases until prices start falling back toward a healthy level.

Investors also remain worried that the Russia-Ukraine war, along with the latest COVID-19 lockdowns in China, would result in tight global supply chains and push consumer prices even high. This, in turn, 
lifted the yield on the benchmark 10-year US government bond back closer to the 3.0% threshold, which helped the USD to regain positive traction.

The USD maintained its bid tone following the release of the US housing market data. Housing Starts in the US fell 0.2% in April to 1.724M, below the 1.728M in the previous month and expectations for a rise to 1.765M. Meanwhile, Building Permits fell 3.2% to 1.819M in April from the 1.879M previous, though was better than a fall to 1.812 million expected.

On the other hand, the British pound was pressured by fears of stagflation and the UK-EU impasse over the Northern Ireland protocol. Given that the UK economic activity had slowed sharply during the first quarter, the latest consumer inflation figures reaffirmed the Bank of England's gloomy outlook and weighed heavily on sterling.

On the Brexit front, the UK government on Tuesday announced a bill that would effectively override parts of a Brexit deal. The European Commission had pledged to respond with all measures at its disposal if Britain moves ahead with a plan to rewrite the NI protocol. Investors now fear that the legislation could trigger a trade war and take its toll on the UK economy.

Despite the negative factors, spot prices showed resilience below the 1.2400 round figure and found a decent support near the 1.2370 region. This warrants some caution before confirming that the recent bounce from the 1.2155 region, or the lowest level since May 2020 touched last week has run its course and placing aggressive bearish bets around the GBP/USD pair.

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