Title: GBP/USD drops to fresh daily low, below mid-1.2000s amid aggressive USD buying

July 5, 2022 05:18AM ET

By: AnalysisWatch

The GBP/USD pair came under renewed selling pressure at the start of the European session on Tuesday, sinking to a two-day low just below the 1.2000 level in the last hour.

After the brief breather overnight, the U.S. dollar traded aggressively, hitting a fresh 20-year high amid prospects of more aggressive rate hikes by the Fed. The bets were reinforced by Fed Chairman Jerome Powell's comments last week that the U.S. economy is well-positioned to withstand tighter policy. Apart from that, a turnaround in global risk sentiment gave an additional boost to the safe-haven greenback, which in turn exerted some downward pressure on the GBP/USD pair.

Recent optimism on reports that US President Joe Biden is considering lowering tariffs on Chinese goods faded quickly in light of the deteriorating economic outlook. Investors remain concerned that rapidly rising interest rates and tightening financial conditions will challenge global economic growth. This, along with the ongoing Russia-Ukraine war and the COVID-19 outbreak in China, has stoked recession fears and further weighed on investor sentiment.

Sterling came under further pressure from fears that the U.K. government's controversial Northern Ireland Protocol Act could trigger a trade war with the European Union amid the cost-of-living crisis. The fundamental environment supports the prospects of further depreciation of the GBP/USD pair and a fall back towards the year's lows.

Market participants are now looking forward to the release of the BoE's Financial Stability Report.

Following that, BoE Governor Andrew Bailey's press conference will influence the GBP price dynamics and give some boost to the GBP/USD pair. Traders will also look for short-term opportunities in the major currencies based on the overall risk sentiment in the market and USD price dynamics.