GBP/USD buyers approach 1.2000 even as Brexit, Downing Street drama joins recession woes

• GBP/USD snaps two-day downtrend at the lowest levels since March 2020.
• UK PM Johnson refrains from stepping down despite political push, slew of Tory resignations.
• EU’s Šefčovič rejects the UK’s NIP efforts, inversion of the yield curve highlights recession fears.
• Brexit headlines and UK’s political news will be crucial to watch for fresh impulse.

GBP/USD grinds higher around the intraday top near 1.1950, snapping a two-day downtrend at the lowest levels since 2020. The cable pair’s latest strength could be linked to the UK’s political and Brexit problems. However, the recent pullback in the US dollar appears to challenge the pair sellers during Thursday’s sluggish Asian session.

Despite witnessing over 30 resignations, including key personnel like Health Minister and Chancellor, UK PM Boris Johnson failed to accept the Tory backbenchers’ push to leave the position. Recently, Michael Gove, one of the most senior ministers in the British government, earlier told Prime Minister Boris Johnson he must quit. 

Elsewhere, EU Commissioner for Interinstitutional Relations and Foresight Maroš Šefčovič said on Wednesday that the UK bill on altering the Northern Ireland Protocol is unacceptable. It should be noted that UK PM Johnson is widely talked to have Brexit power that saved his positions multiple times and can do during these turbulent times.

It should be noted that the yield curve inversion, a condition where near-term bond yields are higher than the longer-dated ones, appears to highlight the recession fears. That said, the 2-year bond coupon retreats to 2.96% while showing the inverse gap with the 10-year yields and hints at the global recession. On the same line, International Monetary Fund (IMF) Managing Director Kristalina Georgieva also said, per Reuters, “Global economic outlook has 'darkened significantly' since last economic update.” the IMF chief also added, “Cannot rule out the possible global recession in 2023.” Also exerting downside pressure on the GBP/USD prices were the FOMC Minutes that signaled the Fed policymakers’ readiness to do more to tame inflation.

On the other hand, the softer US data could be linked to the recently easy US Dollar Index (DXY), down 0.10% around 107.00. The greenback gauge jumped to the highest in 20 years the previous day amid the market’s rush to risk safety. US ISM Services PMI for June dropped to 55.3 versus 55.9 in May. The actual figure, however, came in better than the market expectation of 54.5. It’s worth noting that the US JOLTS Job Opening for May declined to 11.25 million versus 11.00 million expected and 11.68 million prior.

Against this backdrop, the US Treasury yields fade the previous day’s recovery from the monthly low whereas the S&P 500 Futures print mild gains by the press time.

Having witnessed a mild short-covering, GBP/USD traders need more clues to extend the latest moves, which in turn highlight the UK’s political updates and the recession news for clear directions.

Technical analysis

Oversold RSI (14) joins a two-month-old support line, near 1.1765, to restrict short-term GBP/USD downside. The corrective pullback, however, needs to cross the monthly resistance line, near 1.2090 by the press time, to recall the buyers.