GBP/USD move has 'gone too far'

The pound has jumped by 2% on the dollar so far this week, with the GBP/USD exchange rate (at the time of writing at least) trading around its highest level since all the way back in October 2021. We contest, however, that this move has almost nothing to do with the UK outlook or sterling itself, and is almost entirely a product of the bearish dollar narrative.

The moderately more upbeat June PMI figures aside, there's not been any major data releases out this week that would change the market’s view on Britain’s economy, which looks highly likely to slow rather sharply in the second quarter, following what was a very solid Q1.

Communications from Bank of England officials this week have also been largely bearish, and swap markets are now assigning around a two-in-three chance of another rate cut at the next meeting in August. While we are somewhat torn between either August or September, the former seems the most logical timing, not least as it will align with the release of the next Monetary Policy Report.

All in all, we think that the move in GBP/USD has gone a bit too far, and we would not be surprised to see a retracement in the pair in the near-term should markets raise bet for an August rate cut, and incoming economic prints continue to point to a second quarter economic slowdown.