GBP/USD struggles near two-week low, bears flirts with 1.2100 mark amid stronger USD

• GBP/USD came under renewed selling pressure on Friday amid a goodish pickup in the USD demand.
• Aggressive Fed rate hike bets, recession fears and the risk-off mood underpinned the safe-haven buck.
• Expectations for a cautious BoE and Brexit jitters support prospects for a further depreciating move.

The GBP/USD pair met with a fresh supply on Friday and dropped back closer to a two-week low touched the previous day, with bears still awaiting sustained weakness below the 1.2100 mark.

A combination of supporting factors assisted the US dollar to regain positive traction on the last day of the week, which, in turn, exerted some downward pressure on the GBP/USD pair. The Federal Reserve’s non-stop chatter about rate hikes to curb soaring inflation, along with the prevalent risk-off mood, drove some haven flows towards the greenback.

Speaking at the ECB Forum in Sintra earlier this week, Fed Chair Jerome Powell lifted market bets for more aggressive rate hikes and said that the US economy is well-positioned to handle tighter policy. Powell further added that the Fed remains focused on getting inflation under control and that the market pricing is pretty close to the dot plot.

The Fed's hawkish outlook added to growing market concerns that rapidly rising rates and tightening financial conditions would pose challenges to global economic growth. Apart from this, a further escalation in tensions between the West and Russia - in response to the latter's invasion of Ukraine - has stoked fears of a possible recession.

This, in turn, continued taking its toll on the global risk sentiment and forced investors to take refuge in traditional safe-haven assets, including the buck. The global flight to safety was reinforced by the recent slump in the US Treasury bond yields, which acted as a headwind for the USD and helped limit losses for the GBP/USD pair, at least for now.

The bias, however, remains tilted in favour of bearish traders amid expectations that the Bank of England would adopt a more gradual approach to raising interest rates. Apart from this, the risk of fresh UK-EU tensions over the Northern Ireland Protocol of the Brexit agreement supports prospects for a further depreciating move for the GBP/USD pair.

Market participants now look forward to Friday's US economic docket, featuring the release of the US ISM Manufacturing PMI for a fresh impetus later during the early North American session. This, along with the US bond yields and the broader market risk sentiment, might influence the USD price dynamics and produce short-term opportunities around the GBP/USD pair.

Technical levels to watch