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- A dramatic USD turnaround from a 20-year high prompts some short-covering around GBP/USD.
- Hawkish Fed expectations, rising US bond yields and the risk-off mood should limit the USD losses.
- The UK’s gloomy economic outlook suggests that the attempted recovery is likely to be short-lived.
The GBP/USD pair stages a goodish bounce from the 1.1650-1.1645 region, or its lowest level since March 2020 touched earlier this Monday. The pair hits a fresh daily high during the early North American session, though lacks follow-through buying and is currently placed just above the 1.1700 mark.
A dramatic US dollar turnaround from a fresh 20-year high is seen as a key factor that prompted some intraday short-covering around the GBP/USD pair. In the absence of any fundamental catalyst, the USD pullback could be solely attributed to some profit-taking and is more likely to remain cushioned amid hawkish Fed expectations.
The bets were reaffirmed by Fed Chair Jerome Powell’s remarks on Friday, signalling that interest rates would be kept higher for longer to bring down inflation. In fact, the markets are currently pricing in a greater chance of a 75 bps Fed rate hike in September. This is reinforced by a further rise in the US Treasury bond yields.
Apart from this, the prevalent risk-off environment – as depicted by a generally weaker tone around the equity markets – supports prospects for the emergence of some dip-buying around the safe-haven buck. This, along with a bleak outlook for the UK economy, warrants some caution before confirming that the GBP/USD pair has formed a bottom.
The fundamental backdrop still seems tilted firmly in favour of bearish traders, suggesting that any subsequent recovery could be seen as a selling opportunity and runs the risk of fizzling out rather quickly. The market focus now shifts to the release of the closely-watched US monthly jobs report, popularly known as NFP on Friday.