A combination of factors pushed GBP/USD higher for the third successive day on Tuesday.Amid an ongoing USD pullback, BoE rate hike bets remained supportive of a strong move up.The UK political crisis could deter bulls from placing aggressive bets and cap upside.
The GBP/USD pair shot to a four-day high, around the 1.3480-1.3485 area during the early part of the European session, supported by a combination of factors, including expectations that the Bank of England will raise interest rates at its upcoming monetary policy review on Thursday, and a flatening yield curve in the US, due to expectations of future Fed policy responses to contain runaway inflation.
GBP/USD has also gained a tailwind from the ongoing US dollar retracement slide from the 18-month peak touched last Friday. Acceptance that the Fed will tighten its monetary policy at a faster pace than anticipated has dampened future growth prospects. Markets have fully priced in an eventual Fed liftoff in March and expect five quarter-point rate hikes by the end of 2022. More recently, however, they have also begun speculating the Fed might adopt a more aggressive policy response to contain stubbornly high inflation, with the first hike in March amounting to as much as 50 bps.The possibility of such a scenario weighed disproportionately on shorter-dated bonds on Monday, narrowing the yield gap between 2-year and 10-year US government notes to the lowest level in over a year which, in turn, undermined the greenback.
From a technical perspective, sustained strength beyond the 23.6% Fibonacci retracement level of the 1.3749-1.3358 recent leg down was seen as a key trigger for intraday bullish traders. Some follow-through buying beyond 200-hour SMA should pave the way for a further appreciating move. The pair might then surpass the 38.2% Fibo. level, around the 1.3500 psychological mark, and test the next relevant hurdle near the 1.3520-1.3525 region. That said, technical indicators on the daily chart are yet to confirm a bullish bias, suggesting that the momentum runs the risk of fizzling out rather quickly.
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