GBP/USD bulls step in on US Dollar weakness

GBP/USD was up some 0.54% in mid-morning US session trade on Monday, traveling from a low of 1.2274 to score a high of 1.2420 after the US Dollar fell sharply during the Wall Street opening hours. 

The greenback was heavily dented by Monday's economic reports that showed US manufacturing activity in March slumped to its lowest level in nearly three years as new orders continued to contract. The Institute for Supply Management (ISM) reported that its Manufacturing PMI fell to 46.3 last month. This was the worst since May 2020, from 47.7 in February. 

Meanwhile, last week’s PCE data, the Federal Reserve´s preferred inflation measure, were mixed.  While headline and core both came in a tick lower than expected, super core accelerated for a second straight month to 4.63% YoY and is the highest since October.  ´´This is not the direction that the Fed desires and so we look for the hawkish tilt in Fed comments to continue,´´ analysts at Brown Brothers Harriman explained. 

Nevertheless, federal funds futures are now pricing in a 60% chance of another 25 basis-point (bp) rate hike by the Fed in May, down around 5% on the back of today´s manufacturing data. Moreover, futures traders have also factored in a pause in June and rate cuts by December. Traders will now await the Services data tomorrow. ´´We look for the ISM Services index to retreat after showing signs of stabilization at a still-firm level of ~55 in Jan-Feb,´´ analysts at TD Securities said. 

BoE in focus

Domestically, with regards to the Bank of England, May's Monetary Policy Committee decision is likely to be ´´finely balanced´´, analysts at TD Securities argued.

´´Any early sight on how the (especially) centrist and hawkish MPC members are positioning themselves will be important,´´ the analysts said. 

On Monday, the Bank of England Chief Economist Pill stressed that policy remains data-dependent.  He said inflation remains too high but stuck with the bank’s forecast that it will fall sharply this year. 

 “We raised rates by 400 bp. These measures take up to eighteen months to take effect. Should more be done? We will have to see how inflation evolves.”   

He added that “the UK banking system is well capitalized and that well-capitalized banks help combat inflation, though inflation is still far too high.”

“For inflation to return to its target, developments in the labor market, which remains tight, will also be decisive,´´ he said. 

Analysts at Brown Brothers Harriman said that the BoE tightening expectations remain subdued.  ´´The next policy meeting is May 11 and WIRP suggests around 75% odds of a 25 bp hike, with odds of another 25 bp hike topping out near 75% in Q3.  As a result, the peak policy rate is now seen between 4.50-4.75%, up from 4.25% during the height of the banking panic,´´ the analysts explained. 

NFP eyed as key event

Looking ahead, the focus this week will be on Friday's jobs report, although many markets will be closed for the Easter holiday.

´´US payrolls likely stayed firm at a still above-trend pace in March, though slowing from stronger prints in Jan-Feb,´´ the analysts at TD Securities explained. 

´´We also look for the Unemployment Rate to stay unchanged at 3.6%, and wage growth to print a firm 0.3% MoM.´´