**Following a Hawkish Fed Stance, GBP/USD Has Declined for Three Consecutive Days Below 1.32**
*Credit: Original article by VT Markets*
**Overview**
The GBP/USD pair has experienced downward pressure for three consecutive days, closing below the 1.32 handle in the wake of a firm hawkish policy stance from the Federal Reserve. As traders adjust their portfolios to price in the potential for more aggressive US monetary policy tightening, the British pound has faced escalating volatility and persistent selling pressure. This article examines the macroeconomic catalysts driving the recent GBP/USD decline, analyzes key technical and fundamental factors, and outlines what market participants may expect in the sessions ahead.
**Key Drivers of GBP/USD Weakness**
The following factors have contributed to the recent slide in GBP/USD:
– **Hawkish Federal Reserve Messaging**
The most recent Federal Open Market Committee (FOMC) meeting saw policymakers strike a decidedly hawkish tone. Powell and fellow FOMC members emphasized concern with persistent inflation and made it clear that the central bank would lean towards contractionary policy, including the possibility of multiple rate hikes and aggressive balance sheet reduction.
– **US Treasury Yield Surge**
Following the Fed’s statements and projections, US Treasury yields marched higher, bolstering the attractiveness of US assets and amplifying dollar strength across global markets. Specifically, the yield on the 10-year Treasury climbed, signaling robust expectations for further tightening.
– **Global Risk Sentiment Cools**
The equity market experienced bouts of risk aversion and volatility. With global investors seeking safe-haven alternatives, flows into the US dollar intensified, putting further downward pressure on major dollar crosses including GBP/USD.
– **Challenging UK Economic Backdrop**
UK economic data has painted a mixed picture, with recent prints showing signs of slowing economic momentum amid ongoing inflationary pressures, Brexit-related headwinds, and higher input costs for businesses.
**Macroeconomic Developments and Market Reaction**
The US dollar’s appreciation in recent sessions has been decisively shaped by market reaction to several macroeconomic developments:
– **Fed’s Dot Plot and Rate Hike Expectations**
The Federal Reserve’s updated dot plot signaled the possibility of three rate hikes in 2022 and more in the years following. The US central bank also expressed willingness to pivot to tighter policy if inflation proves more persistent – a scenario now increasingly likely. Markets rapidly repriced expectations for the pace and magnitude of US rate hikes, with fed funds futures contracts forecasting potentially four or more rate increases before 2023.
– **Inflation Concerns Persist**
US CPI and PPI data remain at multi-decade highs. Although the Fed previously characterized inflation as transitory, its tone has shifted towards recognizing the risk of entrenched price pressures. This hawkish rhetoric has pushed the US dollar to fresh highs, particularly against sterling, which is weighed down by comparatively softer rate hike expectations from the Bank of England.
– **UK Economic Data Disappoints**
UK GDP growth has begun to lose momentum, with recent figures underwhelming market estimates. In addition, inflation in the UK continues to surge, but the Bank of England has taken a more cautious approach to tightening, raising doubts over its willingness to match the Fed’s pace. Rising Omicron variant cases further complicate the economic outlook, adding downside risk to the pound.
– **Brexit Frictions Resurface**
Ongoing uncertainty over post-Brexit trade arrangements and political wrangling between the UK and the European Union has weighed on sterling. Potential disruptions to UK-EU trade and lingering debates over the Northern Ireland Protocol have kept investors wary of holding exposure to the pound.
**Technical Analysis of GBP/USD**
From a technical standpoint, GBP/USD has broken through several key support zones, signaling the potential for continued downside. The following points summarize recent price action and chart dynamics:
– **Breakdown Below Psychological Level**
The pair
Read more on GBP/USD trading.