GBP/USD off lows, still in the red below 1.3900 mark ahead of Powell's testimony

• A combination of factors prompted some fresh selling around GBP/USD on Tuesday.
• The Fed’s hawkish turn, an uptick in the US bond yields continued underpinning the USD.
• Comments by British Health Minister Matt Hancock helped limit any further losses.

The GBP/USD pair maintained its offered tone heading into the North American session, albeit has managed to recover a bid from daily swing lows. The pair was last seen trading around the 1.3885-80 region, still down over 0.30% for the day.

The pair faced rejection on near 100-day SMA, around the 1.3935 region on Tuesday and eroded a part of the previous day's strong gains of over 150 pips from two-month lows. A combination of factors continued acting as a tailwind for the British pound. This, along with the emergence of some fresh buying around the US dollar, exerted some downward pressure on the GBP/USD pair.

Following a modest pullback on Monday, the USD was back in demand and remained well supported by the Fed's sudden hawkish shift last week. It is worth recalling that the Fed surprised investors and brought forward its timetable for the first post-pandemic interest rate hikes. Apart from this, a modest uptick in the US Treasury bond yields further underpinned the greenback.

St. Louis Fed President James Bullard said on Monday that the Fed should be prepared for inflation to surprise on the high end. Moreover, the Fed Chair Jerome Powell – in the prepared statement for congressional testimony – also highlighted the risk of rising inflation pressures. This, in turn, pushed the yield on the benchmark 10-year US government bond back closer to 1.50%.

On the other hand, the sterling was weighed down by concerns about the EU-UK stand-off on the Northern Ireland protocol. In the latest development, British Brexit minister David Frost said that we're trying to find solutions but there is not a huge amount of engagement from the EU. Frost further added that the delicate balance in the N. Ireland Good Friday agreement risks being unsettled.

Despite the negative factors, the GBP/USD pair managed to find some support at lower levels. The British Health Minister Matt Hancock said on Tuesday the COVID-19 data looks encouraging and currently suggests England's lockdown can fully end on July 19. This seemed to be the only factor that extended some support to the major and helped limit any deeper losses, at least for the time being.

Investors also seemed reluctant to place any aggressive bets, rather preferred to wait on the sidelines ahead of the upcoming Bank of England meeting on Thursday. In the absence of any major market-moving economic releases, this further makes it prudent to wait for some strong follow-through selling before positioning for any further appreciating move.

Technical levels to watch