GBP/USD recovers back above 1.2400

• GBP/USD has recovered much of Wednesday’s decline and is back above 1.2400 as the dollar fades.
• The 21 DMA again offered strong resistance around 1.2500, which could be a key resistance zone.
• UK data and its implications for the economic outlook and Bank of England policy remain in the spotlight with retail sales data due out on Friday.

After falling more than 1.0% on Wednesday amid risk-off flows and technical selling following the rejection of the 21-day moving average, the GBP/USD posted a healthy recovery on Thursday. The pair has traded back above the 1.2400 level and is currently hovering around 1.2425, with gains on the day of around 0.7%, with the pound mainly benefiting from dollar weakness as yields Americans have dropped.

While US yields across most of the curve are trading lower for the week, UK yields continue to trade substantially higher following Tuesday’s strong UK labor market report and after data on Wednesday revealed that UK consumer price inflation hit a four-decade high of 9.0% year-on-year. This combination of data seems to have reignited some of the bets on the Bank of England tightening, which had mostly eased on UK growth fears in recent weeks.

The Bank of England tightening debate will continue to be a key driver for the British pound for the rest of the week as retail sales data for April will be released on Friday. Traders will recall that the ugly March report was one of the key catalysts for GBP/USD’s rapid decline in mid-April, as it highlighted the plight of consumers as the UK goes through its worst utility cost crisis ever. life in decades.

Therefore, traders will continue to ponder the Bank of England’s policy dilemma regarding the need for further tightening. Another poor retail sales report, coupled with continued weak risk appetite over the coming days (Wednesday was Wall Street’s worst day since June 2020), could see GBP/USD quickly give back its weekly gains, which are currently slightly above 1.0%.

Traders should note that buying dollar dips has been a profitable strategy in recent months, given the Fed’s change in stance and broader weakness in risk assets. The message from Fed policymakers this week was that the bank remains resolutely focused on fighting inflation, which means rapid policy tightening remains on autopilot for now, with a high probability of rates rising above the so-called neutral level. This stance is much more aggressive than that of the Bank of England, suggesting that in the short term, 1.2500 could still be a top, as has been the case so far this week.

Technical levels