- GBP/USD has pulled back from an unexpected rise to 1.2600 following Brexit headlines.
- The pair is trading again at 1.2560, despite Sunak’s announcement of significant additional help for low-income households.
The pair GBP/USD has momentarily hit a fresh three-week high above 1.2600 in early trading as the pound has been buoyed by reports that UK Chancellor of the Exchequer Rishi Sunak may be about to announce Major new relief for British consumers suffering from the UK’s worst cost of living crisis in decades. In a recent announcement, Sunak appeared to exceed these expectations, announcing a new mix of energy-related grants and one-off payments that would bring total tax relief to consumers since the start of the cost crisis to around £37bn. of the life.
Despite this, GBP/USD has retraced from session highs and is now trading modestly lower again at 1.2565. Traders may have been inclined to take some gains in the British pound before testing the monthly highs at 1.2635. The dollar could come under modest selling pressure again as attention turns back to the Fed following Wednesday’s release of the Minutes from the last meeting.
In short, while the minutes showed strong FOMC support for 50 basis point rate hikes at the next two Fed meetings, there were no standout hawkish surprises. Indeed, analysts said the tone of the Minutes was in favor of FOMC members pausing or slowing rate hikes once they hit neutral later in the year (allowing for inflation), at which point the Fed could reassess the need for further tightening. Long-term US bond yields have been falling of late as US recession fears rise and Fed bets are reduced, and if this trend continues, GBP/USD may once again break above 1.2600.
But one big potential downside risk to watch out for is Brexit tensions. Reports this morning suggest that the UK government will introduce legislation as early as June 6 that would allow the UK to make unilateral adjustments to its accession to the Northern Ireland Protocol. The EU has threatened that if the UK unilaterally leaves the Northern Ireland Protocol, it could respond by scrapping the post-Brexit trade deal with the UK. This would spell catastrophe for the already weak British economy, which is in a phase of stagflation, and could weigh heavily on sterling if trade tensions with the EU continue to escalate.
Technical levels
Source: Fx Street
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