GBP/USD drops to over one-month low, further below 1.2400/50-day SMA on weaker UK PMIs

• GBP/USD drops to over a one-month low on Tuesday and is pressured by modest USD strength.
• A combination of factors remains supportive of elevated US bond yields and underpins the USD.
• Bets for fewer BoE rate hikes, weaker UK PMIs weigh on the GBP and contribute to the decline.

The GBP/USD pair comes under some renewed selling pressure on Tuesday and drops to over a one-month low during the first half of the European session. The pair is currently placed just below the 1.2400 round-figure mark, down around 0.35% for the day, confirming a fresh breakdown through the 50-day Simple Moving Average (SMA).

A combination of factors lifts the US Dollar (USD) back closer to its highest level since March 20 touched last Friday, which, in turn, is seen dragging the GBP/USD pair lower. The overnight hawkish remarks by a slew of influential Federal Reserve (Fed) officials reaffirmed expectations that the US central bank will keep interest rates higher for longer. In fact, the markets are now pricing in a small chance of another 25 bps lift-off at the June FOMC meeting. Moreover, investors have been scaling back their bets for interest rate cuts later this year. This, along with hopes that US politicians can come together on a debt ceiling deal, keeps the US Treasury bond yields elevated and continues to benefit the Greenback.

In fact, the yield on the benchmark 10-year US government bond rise for a seventh straight day on Monday and register its longest winning streak since April 2022. Apart from this, worries over slowing global growth, particularly in China, further benefit the safe-haven buck. The British Pound (GBP), on the other hand, is undermined by expectations that fewer rate increases by the Bank of England (BoE) will be needed in the coming months to bring down inflation. The bets were lifted by rather unimpressive UK jobs data released last Tuesday and BoE Governor Andrew Bailey's comments, saying that inflation has turned the corner and there are some signs that the labour market is loosening a little.

Apart from this, the disappointing release of the flash UK PMI prints for May further contributes to the offered tone around the GBP/USD pair. The S&P Global/CIPS reported this Tuesday that the UK Manufacturing Purchasing Managers’ Index (PMI) fell to 46.9 in May versus 48.0 expected and, April’s final reading of 47.8. Furthermore, the Preliminary UK Services Business Activity Index for May slipped to 55.1, compared with a 55.9 final print for April and 55.5 expected. This, in turn, favours bearish traders and supports prospects for a further intraday depreciating move for the major.

Market participants now look forward to the US economic docket, featuring the flash PMI prints, New Home Sales data and the Richmond Manufacturing Index. due for release later during the early North American session. This, along with the US debt ceiling talks and the US bond yields, will influence the USD price dynamics and provide some impetus to the GBP/USD pair. Apart from this, traders will take cues from the broader risk sentiment to grab short-term opportunities.

Technical levels to watch