- GBP/USD gained some positive traction on Friday amid modest dollar weakness.
- Bank of England expectations and Brexit woes acted as a headwind for the British pound.
- Aggressive bets on Fed rate hikes should help limit dollar losses and cap gains.
The pair GBP/USD supported the previous day’s bounce near the weekly low around the 1.2170-1.2160 area and gained some positive traction on Friday. The pair maintained its bid tone throughout the early American session, although it seemed to struggle to capitalize on the move or find acceptance above the 1.2300 round figure.
The strength of the cross, stemming from the EUR/GBP’s decline from one-week highs hit on Thursday, has been a boost for the British pound. Elsewhere, the risk appetite boost undermined the safe-haven US dollar, which to a greater extent helped offset disappointing UK data and offered some support to the GBP/USD pair.
The UK’s Office for National Statistics reported on Friday that major retail sales contracted 0.5% mom in May, compared with 1.4% growth in the previous month. Core retail sales excluding auto fuel also slowed sharply, falling 0.7%m/m from 1.4% in April, raising concerns about UK economic growth.
Weaker economic data from the UK further fueled recession fears and bolstered market bets that the Bank of England would opt for a more gradual approach to raising interest rates. By contrast, the Federal Reserve is expected to maintain its aggressive tightening policy and raise rates by 75 basis points again at its next meeting in July.
Fed Chairman Jerome Powell, during his second day before Congress on Thursday, raised the stakes and underscored an unconditional commitment to tame inflation, even amid risks to growth. This could limit dollar losses, which, coupled with the deadlock between the UK and the EU over the Northern Ireland protocol to the Brexit deal, should limit GBP/USD gains.
Therefore, it will be prudent to wait for strong follow-on buying beyond the weekly high, around the 1.2325 region, before positioning for any further upside moves. Market participants are now awaiting the US economic docket, which will see the release of the revised Michigan Consumer Sentiment Index and new home sales data, which could give the GBP/USD some lift. .
Technical levels
Source: Fx Street
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