GBP/USD retreats towards 1.3500 as Brexit, UK politics join pre-Fed caution

• GBP/USD fades corrective pullback from three-week low, indecisive during Asia.
• France reissues legal threat to UK over fishing issues, EU’s Sefcovic ‘frustrated’ over Brexit deadlock.
• The UK eases covid-linked restrictions on international arrivals, PM Johnson awaits Tory reaction to ‘Partygate’.
• Fed, BOE both expected to turn hawkish but today is the FOMC day and hence pair bears stay hopeful.

GBP/USD consolidates the previous day’s rebound near 1.3510 during a sluggish session ahead of Wednesday’s London open.

Although the pre-Fed anxiety becomes the key burden weighing down the pair prices, downbeat concerns over Brexit and the UK politics also exert an additional downside burden on the GBGP/USD prices.

The cable pair bounced off a monthly low the previous day amid escalating chatters over the Bank of England’s (BOE) rate hike and political fraternity flashing lesser negatives for UK Prime Minister (PM) Boris Johnson. On the same line was the market’s cautious sentiment ahead of today’s US Federal Reserve (Fed) monetary policy meeting.

Although UK activity numbers couldn’t match the likes of the British important and employment data for January, the Omicron-linked supply outage is likely to push the “Old Lady” towards a rate hike earlier than previously signaled. In this regard, Reuters said, “Britain's central bank looks on course to raise interest rates next week for the second time in less than two months, reversing more of its COVID-19 pandemic stimulus, after inflation jumped to its highest in nearly 30 years.”

Also positive for the GBP/USD prices could be the UK’s reduction in the covid-linked entry barriers for the foreign arrivals, as well as talks that Britain will have good post-Brexit trade deals with the US and India.

On the contrary, France reiterates dislike for the post-Brexit fishing laws per European affairs minister Clement Beaune. Also portraying the Brexit fears were headlines from the UK Express saying, “(EU) Brexit negotiator Maros Sefcovic is "frustrated" with the UK after another week of talks with Liz Truss that brought no breakthrough.”

It’s worth noting that the Russia-Ukraine woes, downbeat economic forecasts by the International Monetary Fund (IMF) and hawkish Fed expected, backed by firmer US inflation expectations, per the 10-year, breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, also play their roles to limit immediate GBP/USD moves.

Moving on, GBP/USD traders will pay attention to Fed Chair Jerome Powell’s speech as the Fed Boss is likely to tease the March rate hike, which in turn could weigh on the GBP/USD prices.

Read: Federal Reserve Interest Rate Decision Preview: Inflation, Omicron and equities

Technical analysis

Unless crossing the 100-DMA level of 1.3535, GBP/USD remains vulnerable to retest the 50-DMA, around 1.3420 at the latest.