Powell, the Fed’s Powell, powers the USD. This highlights the policy imbalance with Bailey.
The technical setup favors bears, so the downside bias is not changing.
GBP/USD experienced a down week, almost reaching the 1.2900 threshold. This makes the recent rebound seem like an aberration to an ongoing multimonth downtrend. GBP bulls tried to regain 1.3100 in week two, but US dollar demand was unsurpassed. While the UK docket seems relatively quiet, the pair is preparing for key US economic releases.
GBP/USD: Sellers return with a bang
The US dollar dominated a week that was dominated central bankers. Treasury yields were influenced by hawkish Fed commentary. It was quiet beginning. The market expected a 70% chance that the Fed would raise its rate twice in May and June, after US inflation reached a record 8.5% in March. Investors remained on the edge due to a lack of progress on Russia-Ukraine diplomacy, which also supported the dollar’s haven market.
The bearish bets on GBP/USD were exaggerated by Easter Monday’s thin trading, while the same hawkish Fed narrative continued into Tuesday. As the Fed’s hawkish outlook continued, the dollar bids and yields were both pushed to the limit by the Fed’s hawkish outlook, the currency pair closed at 1.2973 Tuesday. James Bullard, President of the St. Louis Fed, made the case for a 75-bps rate increase if necessary. His remarks brought the benchmark 10-year Treasury yield closer towards the 3% mark. Cable remained influenced by Fed expectations despite no significant economic news from either side of the Atlantic.
The major reversed its four-day decline and climbed to 1.3070 on Wednesday. This was after the US dollar corrected sharply. Yields from two-year highs tracked the rapid retracement of the USD/JPY pairing. Additionally, the greenback was also affected by hawkish comments from Martins Kazaks (ECB policymaker), who stated that “a rate increase is possible as soon July.” Other policymakers continued to voice their support for the hawkish shift in ECB policy guidance on Thursday.
However, the party for GBP bulls crashed after the greenback staged an V-shaped recovery following the jump in yields on US bonds due to Fed Chair Jerome Powell’s comments at the IMF conference. Powell supported front-loading rate increases, and confirmed a 50-bps lift-off on May. Cable fell to 1.3000 after it ran into offers below 1.3100. On Thursday, Andrew Bailey, Governor of the BOE, spoke at an event and expressed concern about a slowdown for UK economic growth.
The BOE’s problems were exacerbated by Friday’s disappointing UK Retail Sales results and S&P Global Services PMI. This pushed the pound below 1.2900 against the dollar, its lowest point since November 2020. UK Retail Sales fell 1.4% in March, compared to -0.3% and -0.5% respectively. Preliminary UK Services Business Activity Index April fell to 58.3 from March’s 62.6 or 60.0, respectively.
On Friday, data from the US showed that private sector business activity increased at a slower pace than expected in April. The S&P Global Composite PMI fell to 55.5 from 58.1 as analysts had predicted. The dollar remained strong and did not allow GBP/USD to make a significant recovery. The BOE Governor Bailey stated that the UK’s inflation was likely to rise due to rising energy costs.
Week ahead: The US GDP is strong despite Fed’s “blackout period”
In terms of top-tier economic news from the UK, there is not much to report in the first half. GBP/USD will therefore continue to follow the US dollar price action influenced by bond market sentiment.
The US Durable Goods Orders (and CB Consumer Confidence) will be released on Tuesday. However, these numbers are unlikely to impact the market’s pricing of Fed tightening plans. In will be published the UK CBI Realized Sales, US Goods Trade Balance, and Pending Home Sales.
Thursday’s Preliminary USQ1 GDP will be the most important event risk of the week. The US economy is expected to expand by just 1%, compared to the 6.9% growth previously reported. However, slower growth and lower core inflation may not change the Fed’s aggressive tightening expectations or the demand for the US dollar. In parallel, the US Jobless Claims Weekly will be published.
Next in importance will be the Fed’s preferred inflation gauge, the core PCE Price Index. This index is scheduled to be released on Friday. Fed policymakers will not be able to speak as they have entered their ‘blackout’ period ahead of the May 4 Fed decision. The Fed-BOE Monetary Policy Divergence theme, and the dynamics for the yields, will continue to be in effect.
