GBP/USD sold-off at 1.3300 as UK inflation, Ukraine crisis limit bulls.GBP/USD is unlikely to alter its course. Concerns over soaring inflation and Ukraine tensions resurfaced and crippled GBP/USD’s recovery rally from 2022 lows. GBP bulls lost conviction, as the central banks’ divergence returned to the fore. In the week ahead, the US Nonfarm Payrolls, Fed’s preferred PCE inflation and BOE-speak will hold relevance, as the Russia-Ukraine conflict rages on.
GBP/USD bulls gave into the bearish pressures.GBP/USD booked the second straight weekly gain, although remained well off the three-week highs of 1.3300. After a shaky start to a new week on Monday, GBP bulls fought back control and extended the previous week’s rebound well into early Wednesday, testing the 1.3300 psychological hurdle.
In the first half of the week, the US dollar staged a solid recovery, tracking the power rally in the Treasury yields to three-year highs, largely backed by the hawkish comments from Fed Chair Jerome Powell and his colleagues. Powell, in his prepared remarks at the National Association for Business Economics (NABE) conference, said that the central bank must move “expeditiously” to combat inflation, leaving doors open for 50-basis rate hikes, if needed. Taking his hawkish lead, officials at the world’s most powerful central bank also called out for aggressive tightening, as the US economy and its labor market remain healthy. In light of the hawkish pivot, the CME FedWatch tool now shows a 68.3% probability of a 50 bps rate hike at the May FOMC policy meeting.
The relief rally evaporated on Wednesday after the UK inflation came in hotter than expected at 6.2% in February and at its highest level in 30 years. GBP/USD reversed sharply from multi-week highs and breached 1.3200 once again, as soaring UK inflation raised concerns about the country’s economic health while accentuating the BOE’s dilemma. The BOE had already turned cautious at its March policy announcement due to the negative impact of higher inflation on economic activity. The monetary policy divergence between the Fed and the BOE came into play and weighed heavily on cable.
GBP/USD: Week ahead.Nothing will likely change fundamentally for.GBP/USD in the week ahead, as developments surrounding the Ukraine conflict and the central banks’ divergent outlook will continue to drive sentiment.
In the absence of any first-tier economic data from the UK, BOE Governor Andrew Bailey’s speech will be closely eyed for fresh hints on future policy path. Bailey is due to speak about macroeconomics and financial stability at an online event hosted by Bruegel on Monday. The Q&A session after his speech will be key to watch.
Next of relevance for the pair remains Wednesday’s US ADP Employment Change data while BOE Deputy Governor Ben Broadbent’s speech will also be followed. Investors are likely to pay a little heed to the final revisions of the UK and US GDP data.
GBP/USD: Technical outlook
GBP/USD faces an interim resistance at 1.3250 (Fibonacci 38.2% retracement of the latest downtrend) before it can target 1.3300 (Fibonacci 50% retracement, March 23 high). A daily close above the latter could attract bulls and help the pair rise toward 1.3400 (Fibonacci 61.8% retracement, 50-day SMA, 100-day SMA).
On the downside, 1.3150 (Fibonacci 38.2% retracement) aligns as first support before the critical 1.3100 level, where the 200-week MA is located. In case sellers manage to drag GBP/USD below 1.3100 and hold it there, 1.3000 (psychological level, static level) could be seen as the next bearish target.
EUR/USD clings to modest gains above 1.1000.EUR/USD gained traction in the early American session and climbed into positive territory above 1.1000. The risk-positive market environment, as reflected by rising US stock indexes, is making it difficult for the greenback to find demand and helps the pair edge higher.
GBP/USD reclaims 1.3200 supported by risk flows.GBP/USD fell toward 1.3150 in the early European session after disappointing Retail Sales data from the UK but managed to erase its daily losses. With risk flows starting to dominate the financial markets, the pair is posting modest gains above 1.3200.
Gold fluctuates near $1,950 despite rising US T-bond yields.Gold declined toward $1,940 earlier in the day as the benchmark 10-year US T-bond yield climbed to fresh multi-year highs near 2.5%. The broad-based selling pressure surrounding the dollar, however, helped XAU/USD recover above $1,950.