- GBP/USD witnessed some intraday selling on Tuesday and dropped to a three-day low.
- Brexit woes, less hawkish BoE expectations continued acting as a headwind for sterling.
- Rising US bond yields revived the USD demand and contributed to the intraday selling.
The GBP/USD pair retreated nearly 60 pips from the daily swing high touched during the early European session and dropped to a three-day low, around the 1.2235-1.2230 region in the last hour.
The latest Brexit-related development over the Northern Ireland Protocol has raised the risk of fresh tension between Britain and the European Union. In fact, the UK House of Commons on Monday voted 295 to 221 in favour of a controversial bill that would unilaterally overturn part of Britain's divorce deal from the EU agreed in 2020.
Apart from this, speculations that the Bank of England (BoE) will adopt a more gradual approach towards raising interest rates amid fears of a UK recession acted as a headwind for the British pound. This, along with the emergence of some US dollar buying dragged the GBP/USD pair away from over a one-week high touched the previous day.
The risk-on flow pushed the US Treasury bond yields higher, which, in turn, assisted the USD to reverse its modest intraday losses. That said, reduced bets for a more aggressive policy tightening by the Fed might hold back the USD bulls from placing aggressive bets and help limit deeper losses for the GBP/USD pair, at least for the time being.
The recent decline in commodity prices now seems to have eased concerns about the persistent rise in inflation. This, along with the worsening economic outlook, forced investors to reassess expectations for a faster policy tightening by the Fed. Hence, the market focus will remain glued to Fed Chair Jerome Powell's appearance on Wednesday.
The BoE Governor Andrew Bailey is also due to speak at the ECB forum in Sintra, Portugal on Wednesday, which would help investors determine the next leg of a directional move for the GBP/USD pair. In the meantime, traders on Tuesday will take cues from the US macro data - the Conference Board's Consumer Confidence Index and Richmond Manufacturing Index.
Technical levels to watch
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