GBP/USD recovers further from YTD low, climbs to 1.3075-80 area amid modest USD weakness

• GBP/USD staged modest recovery from the 1.3000 mark, or a fresh low since November 2020.
• Upbeat UK jobs report reaffirmed BoE rate hike bets and extended support to the British pound.
• Hopes for diplomacy in Ukraine, retreating US bond yields undermined the safe-haven greenback.

The GBP/USD pair added to its intraday recovery gains and climbed to a fresh daily high, around the 1.3075-1.3080 region during the early North American session.

A combination of factors assisted the GBP/USD pair to attract some buying near the 1.3000 psychological mark on Tuesday and stage a goodish rebound from the lowest level since November 2020. The British pound drew support from upbeat UK employment details, which cemented expectations that the Bank of England will hike interest rates at its meeting on Thursday. Apart from this, modest US dollar weakness provided an additional lift to the GBP/USD pair and contributed to the intraday positive move.

Despite the fact that the Russian bombardment of Ukrainian cities has intensified, the optimism over a diplomatic solution to end the war underpinned the global risk sentiment. This was evident from a generally positive tone around the equity markets, which, along with retreating US Treasury bond yields, weighed on the safe-haven greenback. That said, expectations for an imminent start of the policy tightening by the Fed should act as a tailwind for the buck and cap the GBP/USD pair.

The market seems convinced that the recent geopolitical developments might do little to hold back the US central bank from hiking its target funds rate to rein in inflationary expectations. This was seen as a key factor behind the recent sell-off in the US money markets, which pushed the yield on the benchmark 10-year government bond to its highest level since June 2019 on Monday. The fundamental backdrop favours the USD bulls and warrants caution before placing bullish bets around the GBP/USD pair.

On the economic data front, the US Bureau of Labor Statistics reported that the Producer Price Index (PPI) for final demand rose to 10% on a yearly basis in February from the 9.7% previous. Meanwhile, the annual Core PPI, which excludes food and energy prices, edged higher to 8.4% from 8.3% as against 8.7% estimated. Separately, the Empire State Manufacturing Index declined to -11.8 in March from 3.1 in February and missed the 7.25 expected by a big margin. The data failed to provide any meaningful impetus to the USD or the GBP/USD pair as the focus remains on fresh geopolitical developments.

Investors also seemed reluctant and might prefer to wait on the sidelines ahead of the key central bank event risks. The Fed is scheduled to announce the outcome of a two-day policy meeting during the US session on Wednesday. This will be followed by the BoE policy meeting on Thursday, which will play a key role in determining the next leg of a directional move for the GBP/USD pair. This further makes it prudent to wait for some follow-through buying before confirming that a near-term bottom.

Technical levels to watch