GBP/USD nosedives to a fresh two-year low around 1.2100s on expectations of a Fed 75 bps hike

• On Monday, the GBP/USD plunged nearly 200-pips, losing almost 1.50%.
• US Federal Reserve expectations of a 75 bps rate hike at the Wednesday meeting keep mounting.
• The UK April’s Gross Domestic Product (GDP) shrank for the second straight month.

The GBP/USD tanked to fresh two-year lows around 1.21054 but slightly recovered as investors assessed the news that the US Federal Reserve might hike 75 bps on a news piece published by the WSJ. Additionally, the UK’s GDP in a monthly reading contracted, by 0.3%, fueling expectations that the UK is headed into a recession as the Bank of England hikes rates again. At the time of writing, the GBP/USD is trading at 1.2129.

The greenback benefits from risk-aversion and US Fed rate hikes expectations

Concerns that the US Federal Reserve would tighten more than 50 bps following a worse-than-expected US inflation report shifted sentiment sour. Reflection of the previously mentioned is US equities tumbling between 2.80% and 4.81%. Contrarily, US Treasury yields rose, while the greenback gained more than 1%, reaching a two-decade high, around 105.285.

A Wall Street Journal news piece stated, “A string of troubling inflation reports in recent days is likely to lead Federal Reserve officials to consider surprising markets with a larger-than-expected 0.75-percentage-point interest rate increase at their meeting this week,” further weighed on sentiment.

Elsewhere, China’s coronavirus headlines weighed on the already battered mood. According to Reuters, a Covid-19 outbreak linked to a bar, traced by authorities, with millions facing mandatory testing and thousands under targeted lockdowns. The re-emergence of infections raises worries about China’s economic outlook.

Earlier in the European session, the Office of National Statistics (ONS) reported that Gross Domestic Product (GDP) fell by 0.3% in April; but the 3-months to April 2022 rose by 0.2%. Services fell by 0.3%, and it was the main contributor to GDP’s fall, reflecting a decrease of 5.6% in human health and social work. Production fell by 0.6%, attributed to a fall in manufacturing of 1% on the month, as businesses continue to report the impact of price increases and supply chain shortages.

Monday’s GBP/USD price action witnessed the ongoing Sterling weakness. A weaker than expected GDP maintains investors’ expectations that the Bank of England would continue hiking rates, despite the current economic outlook. Therefore, despite the BoE’s rising rates, the GBP/USD is headed to the downside and, during the day, dropped nearly 200 pips as sellers prepare for a test of the 1.2000 figure.

An absent US economic docket left GBP/USD traders adrift to the market sentiment that ultimately benefitted the USD, a headwind for the GBP/USD.

Key Technical Levels