GBP/USD languishes in low-1.2500s, within recent ranges as key risk events loom

Ahead of key risk events including the ECB’s imminent monetary policy announcement at 1145GMT followed by US Consumer Price Inflation at 1230GMT on Friday, GBP/USD continues to languish well within recent ranges. The pair was last trading in the low-1.2500s, having rebounded from an earlier test of the 1.2500 level, where the 21-Day Moving Average (at 1.2498) came in to offer support.

At current levels near 1.2540, cable is trading close to flat on the day, though analysts are highlighting the possibility that, given sterling’s positive correlation to the euro, if the ECB delivers some sort of euro-bolstering hawkish surprise, GBP/USD might test weekly highs in the 1.2600 area. While a hawkish ECB surprise could give the pair some short-term support, it by no means suggests the BoE is going to follow suit.

Indeed, in the World Bank’s latest forecasts for 2022 released on Wednesday, the UK is expected to post the slowest growth in the G20 (excluding Russia), as the country faces its worst cost-of-living squeeze in decades. Against the worsening backdrop in recent weeks, markets have been revising lower their expectations for how much further tightening is in store from the BoE.

In the absence of some good news on the UK economy, the prospect for a lasting sterling rebound remains limited. If GBP/USD was to break higher and test its 50DMA in the mid-1.2600s, that will likely be a US dollar story (i.e. perhaps Friday’s CPI data undershoots expectations, encouraging markets to pare back on Fed tightening bets and sell USD).