- A combination of factors prompted aggressive selling around GBP/USD on Wednesday.
- Stagflation fears, Brexit woes weighed on the British pound amid resurgent USD demand.
- Aggressive Fed rate hike bets, the risk-off mood continued underpinning the safe-haven buck.
The GBP/USD pair struggled to capitalize on its recent bounce from the lowest level since May 2020 and faced rejection near the 1.2500 psychological mark, or almost a two-week high touched earlier on Wednesday. The downfall marked the first day of a negative move in the previous four sessions and was sponsored by a combination of factors. The British pound weakened across the board after data released from the UK showed that consumer inflation soared to a 40-year high of 9% in April. Given that the UK economic activity had slowed sharply during the first quarter, the data-fueled fears about stagflation. This comes from strong wage growth figures released on Tuesday and suggests that inflationary pressures are likely to continue. The UK-EU impasse over the Northern Ireland protocol also exerted additional downward pressure on the sterling.
On Tuesday, the British government announced a bill that would effectively override parts of a Brexit deal.nnnn The European Commission had pledged to respond with all measures at its disposal if Britain moves ahead with a plan to rewrite the NI protocol. The developments fueled fears that the legislation - if passed - would trigger a trade war in the middle of the cost-of-living crisis and take its toll on the UK economy. This, in turn, validated the Bank of England's gloomy outlook, which, along with resurgent US dollar demand, prompted aggressive selling around the major. The greenback made a solid comeback and stalled its corrective pullback from a two-decade high amid expectations that the Fed would need to take more drastic action to bring inflation under control. The bets were reaffirmed by Fed Chair Jerome Powell's hawkish remarks on Tuesday.
Speaking at a Wall Street Journal event, Powell said he would back interest rate increases until prices start falling back toward a healthy level. This, in turn, lifted the yield on the benchmark 10-year US government bond back closer to the 3.0% threshold and underpinned the USD. Meanwhile, the US central bank's determination to fight inflation comes amid concerns that the Russia-Ukraine war and extended COVID-19 lockdowns in China would continue to push consumer prices higher. Furthermore, signs of softening global economic growth further fueled recession fears and triggered a fresh bout of the risk-aversion trade. The anti-risk flow was seen as another factor that boosted the safe-haven buck. The GBP/USD pair tumbled around 170 pips intraday and finally settled near the daily low, though it attracted some buying during the Asian session on Thursday.
In the absence of major market-moving economic releases from the UK, the USD price dynamics would continue to play a key role in influencing the GBP/USD pair. Later during the early North American session, traders will take cues from the US economic docket - featuring Philly Fed Manufacturing Index, the usual Weekly Initial Jobless Claims and Existing Home Sales data. The US bond yields and the broader market risk sentiment would drive the USD demand and provide some meaningful impetus to the major.
Technical outlook
From a technical perspective, the pair on Wednesday failed near the 38.2% Fibonacci retracement level of the 1.3090-1.2156 steep decline. The subsequent fall below the 100-period SMA on the 4-hour chart and the 23.6% Fibo. level might have shifted the bias back in favour of bearish traders. That said, the emergence of some dip-buying on Thursday warrants some caution. Nevertheless, the set-up supports prospects for the resumption of the downtrend witnessed over the past one month or so. Hence, a slide back below the 1.2300 mark towards testing the next relevant support near the 1.2265 region remains a distinct possibility. Some follow-through selling should allow additional losses and drag spot prices further towards the 1.2200 round figure en route to the YTD low, around the 1.2155 region touched last week.
On the flip side, momentum back above the 1.2400 mark now seems to confront stiff resistance near the 1.2430-1.2435 region. Any further move up should attract fresh selling and remain capped near the 1.2500 mark, which should now act as a pivotal point. Sustained strength beyond would suggest that the GBP/USD pair has formed a near-term bottom and trigger a short-covering rally. Spot prices could then climb to the 1.2570-1.2575 intermediate hurdle en route to the 1.2600 mark and the 50% Fibo. level, around the 1.2630-1.2635 zone.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
EUR/USD stays below 1.0800 after upbeat US data
EUR/USD stays under bearish pressure and trades slightly below 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 clings to strong daily gains above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Friday. 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.