- GBP/USD has dipped back below 1.2500 on Wednesday as the dollar rallied ahead of the Fed’s statements and after Tuesday’s weak UK PMIs.
- The monetary policy spread between the Bank of England and the Federal Reserve remains a headwind, as do UK policy and tensions between the UK and the EU over the Northern Ireland Potocolo.
The GBP/USD has dipped below the 1.2500 level again on Wednesday, after failing to sustain a rally towards 1.2560 earlier in the day as the US dollar has seen some buying demand ahead of further Federal Reserve statements and US durable goods orders data is released.
The pair is now trading at 1.2490, down around 0.35% on the day, and investors are likely to look attracted by continuation selling after Tuesday’s UK PMI datawhich revived fears about the UK’s economic weakness and cast further doubt on how much the Bank of England can afford to tighten monetary policy.
BoE Chief Economist Huw Pill did not react to the latest UK data in an interview published on Wednesday, but did say that, although he sees further tightening as necessary, it will not be necessary for the BoE to adopt a “super restrictive” policy. Pill highlighted the risks of over tightening and worsening a recession versus the risks of not doing enough and allowing inflation to maintain its momentum. By contrast, Fed Vice Chair Lael Brainard’s remarks at 16:15 GMT, followed by the publication of the minutes of the last meeting of the Fed at 18:00 GMT, highlight the Fed’s much tougher stance that further significant monetary tightening is likely, including the possibility of taking interest rates into tightening territory.
That spread in central banks’ monetary policy expectations may continue to limit GBP/USD’s rally beyond the 1.2600 level.. In fact, the pair’s recent uptrend appears to be at risk of being broken, which could open the prospect of a drop towards its 21-day moving average around 1.2425. A break below this level would open the door for a move back to monthly lows below 1.2200. Note that politics is also a potential headwind for the British pound at the moment. UK Prime Minister Boris Johnson continues to come under pressure to resign and senior British official Sue Gray is expected to release a report on “partygate” later. At the same time, tensions between the UK and the European Union over the Northern Ireland Protocol continue to run high.
GBP/USD technical levels
Source: Fx Street
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