GBP/USD consolidates at one-month lows under 1.3400 as hawkish Fed, strong GDP data keep dollar buoyant

• GBP/USD is consolidating in the 1.3380 level after dipping under 1.3400 for the first time in over a month.
• Hawkish BoE expectations may be supporting sterling, which outperformed most of its G10 peers even though it succumbed to the dollar.

GBP/USD fell to one-month lows on Thursday underneath the 1.3400 level after slumping below resistance in the 1.3450 area earlier in the session, weighed by a buoyant dollar in wake of Wednesday’s hawkish Fed meeting and strong US GDP data. The pair is now consolidating in the 1.3380 area, practically bang on a level of resistance turned support from back in mid-December, where it trades lower by about 0.6% on the day. Those losses, though extensive, are modest compared to many of sterling’s G10 peers; AUD is down 1.2%, SEK and NZD are down 1.1%, EUR and CHF are down around 0.9%. Sterling’s performance puts it roughly in line with that of the loonie and yen, both of which are also down about 0.6% on the day versus the buck.

While then yen’s comparatively strong on the day performance compared to most of its G10 peers can likely be attributed to choppy US equity market conditions and US yield curve flattening, GBP and CAD may be finding central bank support. Recall that the BoC on Wednesday, while disappointing some calls for a 25bps hike, signaled a rate hike would soon be coming in March (as the Fed did). Meanwhile, investors expect the BoE to lift interest rates by 25bps to 0.25% next Thursday following strong labour market and inflation data for December. While the likes of the euro, Aussie and kiwi have recently broken out to multi-month/year lows, sterling still remains some way above its December 2021 lows just under the 1.3200 area.

Looking ahead, it seems likely that the US dollar’s broad post-Fed rally may have some legs with the Fed seemingly the most intent on monetary policy tightening for some time (i.e. since 2018). Friday’s Core PCE inflation data for December is likely to reinforce that. That keeps GBP/USD downside risks alive, even in the face of BoE hawkishness. Traders should remember to keep an eye on the UK political situation as a UK PM Boris Johnson resignation remains a strong possibility as the partygate scandal drags on. Whilst analysts have so far mostly shrugged off the impact of this political noise on GBP, it surely can’t be helping sterlings cause. Short/medium-term bears will likely be targetting a test of the aforementioned December lows at some point in Q1 2022.