- GBP/USD witnessed aggressive selling on Monday and dropped to a one-week low.
- The impasse over the Northern Ireland Protocol acted as a headwind for sterling.
- The emergence of fresh USD buying also contributed to the sharp intraday decline.
The GBP/USD pair dropped to a one-week low during the first half of the European session, with bears now looking to extend the downfall further below the key 1.3500 psychological mark.
Following an early uptick to the 1.3570 area, the GBP/USD pair came under renewed selling pressure on Monday and extended its recent pullback from the 1.3645 region, or the monthly high touched last week. Tensions over the Northern Ireland protocol of the Brexit agreement, along with Friday's disappointing UK GDP report turned out to be a key factor that acted as a headwind for the British pound. This, along with, the emergence of fresh US dollar buying, exerted pressure on the major and contributed to the latest leg down.
The greenback continued drawing support from growing acceptance that the Fed would adopt a more aggressive policy response to contain stubbornly high inflation. In fact, the market bets for a 50 bps Fed rate hike in March were boosted further following the release of the red-hot US CPI report on Thursday. Apart from this, the risk-off impulse – as depicted by a sea of red across the global equity markets – further benefitted the greenback's safe-haven status and added to the heavy intraday selling around the GBP/USD pair.
The recent price action witnessed over the past one week or so suggests that the markets have digested a more hawkish Bank of England. It is worth recalling that the BoE raised the benchmark interest rate by 25 bps and the vote distribution showed that four out of nine MPC members backed a more aggressive 50 bps increase in borrowing costs. This, in turn, supports prospects for a further near-term depreciating move for the GBP/USD pair amid absent relevant market-moving economic releases, either from the UK or the US.
Traders, however, will take cues from comments by St. Louis Fed President James Bullard, who called for 100 bps rate hikes over the next three FOMC policy meetings. This, along with the US bond yields and the broader market risk sentiment, will influence the USD price dynamics and provide some impetus to the GBP/USD pair.
Technical levels to watch
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