- GBP/USD has been aggressively bid and has hit a 3-day high in the last hour.
- Softer US macro data weighed on the dollar and prompted a short-covering move.
- Rising US bond yields, risk aversion mood capped dollar losses and capped the pair.
The pair GBP/USD experienced a short covering bounce on Thursday and was up nearly 150 pips from the 1.2040 zone, or the daily low touched after the Bank of England policy decision. The momentum carried spot prices to a three-day high around the 1.2280-1.2285 area during the early American session.
The positive intraday move in the US dollar lost steam following the release of disappointing US macroeconomic data, which in turn was seen as a key factor supporting the GBP/USD pair. The US Department of Commerce reported that housing starts fell 14.4% and building permits fell 7% in May. Additionally, the Federal Reserve Bank of Philadelphia’s Current General Activity Diffusion Index fell to -3.3 in June from 2.5 in May. The data added to concerns about weakening US economic growth and prompted some selling around the dollar.
However, elevated US Treasury yields, bolstered by Fed expectations, should help limit any deeper dollar pullback. Fed Chairman Jerome Powell said on Wednesday that the US central bank is “absolutely determined” to keep inflation expectations anchored at 2% and reaffirmed another big hike in July. Furthermore, the so-called dot plot showed that the year-end median projection for the fed funds rate rose to 3.4% from the 1.9% estimate in March and to 3.8% in 2023. This, coupled with the momentum of risk aversion could support the greenback as a haven and cap GBP/USD, at least for now.
Apart from this, expectations that the Bank of England will opt for a more gradual approach to raising interest rates amid recession fears could act as a headwind for sterling. Bulls could also be reluctant to make aggressive bets amid the UK and EU impasse over the Northern Ireland Protocol to the Brexit deal. The fundamental backdrop favors bearish traders, suggesting that any subsequent bullish move is at risk of fading quickly. Therefore, it will be prudent to wait for strong follow-on buying before confirming that GBP/USD has formed a short-term bottom.
Technical levels
Source: Fx Street
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