GBP/USD advances to 1.2625 on softer USD, remains below 100-day SMA support breakpoint

• GBP/USD attracts buyers for the second successive day and draws support from a softer USD.
• A further pullback in the US bond yields and a positive risk tone undermine the safe-haven buck.
• Bets for more Fed rate hikes should act as a tailwind for the US bond yields and the Greenback.

The GBP/USD pair gains some positive traction for the second successive day on Tuesday and recovers further from its lowest level since June 13, around the 1.2550-1.2545 area touched last week. Spot prices trade around the 1.2620-1.2625 zone during the Asian session, up over 0.15% for the day, though remain below the 100-day Simple Moving Average (SMA) support breakpoint.

Retreating US Treasury bond yields drags the US Dollar (USD) away from a nearly three-month top set last week, which, in turn, is seen as a key factor pushing the GBP/USD pair higher. Apart from this, a generally positive risk tone, bolstered by new measures rolled out by China over the weekend to draw investors back into its battered stock markets, further undermines the safe-haven Greenback. The British Pound (GBP), on the other hand, draws support from the Bank of England (BoE) Deputy Governor Ben Broadbent’s hawkish remarks on Saturday, saying that policy rates may well have to remain in restrictive territory for some time.

That said, the possibility of more interest rate hikes by the Federal Reserve (Fed) should act as a tailwind for the US bond yields and help limit any meaningful USD downfall, at least for now. In fact, Fed Chair Jerome Powell said on Friday that inflation remains too high and that the central bank is ready to continue hiking rates to tame persistently high prices. Furthermore, a surprisingly resilient US economy could force the Fed to keep interest rates higher for longer. The expectations had pushed the yield on the benchmark 10-year US government bond to its highest level since November 2007 last week and favour the USD bulls.

Apart from this, growing acceptance that the Bank of England (BoE) will pause its rate-hiking cycle after the widely anticipated 25 bps lift-off at the September meeting might further contribute to capping the GBP/USD pair. Hence, it will be prudent to wait for strong follow-through buying before confirming that the recent downward trajectory witnessed over the past six weeks or so has run its course and positioning for any meaningful appreciating move. Traders now look to the US economic docket, featuring the Conference Board’s Consumer Confidence Index and JOLTS Job Openings data, for some impetus later this Tuesday.

Technical levels to watch