GBP/USD:FUNDAMENTAL ANALYSIS + PRICE ACTION | LONG SETUP

The GBP/USD pair kicked off the new week on a positive note and built on its recovery from the vicinity of mid-1.1700s, or the lowest level since March 2020 touched last Thursday. The strong intraday move up lifted spot prices to a one-week high and was sponsored by a combination of factors. Several Federal Reserve officials said last week that they were not in favour of a bigger interest rate increase at the upcoming policy meeting on July 26-27. This forced investors to scale back their expectations for the recently talked about 100 bps rate hike next week, which prolonged the US dollar profit-taking slide from a two-decade high. Apart from this, hawkish remarks by Bank of England policymaker Michael Saunders underpinned the British pound and provided a goodish intraday lift to the major.

Saunders, who has backed a bigger interest rate rise than most of his colleagues, said that the current tightening cycle may still have some way to go. He further warned that the cost of tightening too slowly was probably higher than the cost of raising rates too much. Saunders added that the benchmark rate could reach 2% or higher next year as the central bank tries to stop the surge in inflation from becoming embedded in the economy. That said, the UK political uncertainty, along with Brexit woes, acted as a headwind for sterling and kept a lid on any meaningful upside for the GBP/USD pair, at least for the time being. The UK Conservative party leadership contest enters a crucial week, with bookmakers seeing a final run-off between Rishi Sunak and Penny Mordaunt as the most likely outcome.

Furthermore, investors remain worried that the UK government's controversial Northern Ireland Protocol Bill could trigger a trade war with the European Union amid the ongoing cost-of-living crisis. This, along with the emergence of some USD dip-buying, attracted some sellers at higher levels and forced the GBP/USD pair to retreat around 85 pips from the daily peak. Market participants seem convinced that the recent high US inflation reading, which accelerated to a four-decade high in June, warrants a larger Fed rate hike move later in the year. Apart from this, the overnight turnaround in the US equity markets drove some haven flows back towards the buck. Nevertheless, the pair finally settled in the green for the second straight day and was seen oscillating in a range through the Asian session on Tuesday.

Traders now look forward to the monthly UK employment details for a fresh impetus. Later during the North American session, BoE Governor Andrew Bailey's scheduled speech will further influence the GBP price dynamics. On the other hand, the broader market risk sentiment would drive the USD demand. This might further contribute to producing short-term trading opportunities around the GBP/USD pair ahead of the UK consumer inflation figures on Wednesday.

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