Two factors have removed support for GBP. One is the recent dovish tone by the Bank of England over monetary policy and secondly the hawkish tone contained in the minutes released by the US Federal Reserve suggesting a US interest rate rise could happen sooner than anticipated.
However, the same holds true for UK interest rates. In the BoE's latest minutes two members voted for a 25 basis point rate rise reflecting signs of nervousness over future inflationary prospects.
True UK inflation and wage rises are both low, but given the strength of the UK's recovery (GDP growing at 3.2%), this could change quickly. Indeed, the rapid fall in unemployment is likely to soon see upward pressures on wages – something the two BoE dissenters appear to be anticipating.
Therefore, a modest 25bp rate rise – hardly enough to derail the strong recovery – could still happen by the end of the year. Also, anticipating inflationary pressure would make bigger interest rate rises less likely later on. The BoE has to be careful that by being too dovish it doesn't end up having to raise interest rates quickly to catch-up with the economy and end up creating a bust.
GBP/USD – hammered!
US recovery makes gains against USD harder
The US Fed is set to wind down its quantitative easing programme in October. The Fed also appears a lot more optimistic about the US economy and seems keen to normalise monetary policy soon.
Certainly, the US economy seems to have rebounded in the last quarter, the pace of jobs creation is strong and at least one member of the Fed is pushing for tighter monetary policy.
Though that makes it tougher for GBP to recover lost ground against USD – the pace of the sell-off looks over-done. Indeed, there should be some form of consolidation on GBPUSD shortly and possibly a recovery later in the year back to around 1.6700-1.6800.
After all the UK has shown itself to be consistently more vulnerable to inflation than the US – suggesting the BoE may have to be more aggressive than the Fed. GBP has also lost some ground to the EUR, which also looks over-done given the Eurozone's lack of economic growth and ongoing deflationary predicament.
Recommended Content
Editors’ Picks
EUR/USD stays near 1.0800 after upbeat US data
EUR/USD stays under modest bearish pressure and trades near 1.0800 in the American session on Thursday. The data from the US showed that the real GDP growth for the fourth quarter got revised higher to 3.4% from 3.2%, supporting the USD and weighing on the pair.
GBP/USD stays in daily range above 1.2600
GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth helps the USD stay resilient against its rivals and limits the pair's upside.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays above 4.2% after upbeat US data and makes it difficult for XAU/USD to preserve its bullish momentum.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.