- GBP/USD bounced on Monday from a key support zone at the top of 1.2450 to the mid 1.2550 level.
- The British pound is outperforming despite the impending no-confidence motion against the UK Prime Minister, which could unseat him from office.
- Otherwise, the week will be quiet until Friday’s US CPI data is released.
Despite British Prime Minister Boris Johnson’s imminent vote of confidence on Monday afternoon (UK time), all is well for sterling at the start of the new week, with the currency outperforming its peers of the G10 as UK markets reopen after a week-long celebration of the Queen’s Platinum Jubilee. Yield spreads appear to be one of the factors behind sterling’s outperformance as UK 2-year yields rose almost 7 basis points on the day as UK bond markets reopen for the first time since last Wednesday.
The pair GBP/USD was last trading up around 0.5% on the day, near the 1.2550 level, having bounced from a strong support zone in the 1.2460-80 region (last week’s lows and 21 days mobile). Analysts believe that a possible loss to Johnson later in the day could be positive, or at least not negative, for the British pound, given the waning authority of the prime minister in recent months, amid the ongoing “partygate” scandal. , in which the Prime Minister and his team incurred a series of political fines for breaching lockdown regulations.
UK political machinations aside, things will be quiet for GBP/USD traders until Friday, when US consumer price inflation data for May is released. Until then, there is a chance that currency markets remain within recent ranges, suggesting GBP/USD remains between 1.2450 to above 1.2650. However, if Friday’s US inflation data points to a further easing of price pressures, some analysts expect dollar weakness to take center stage again.
The easing of price pressures in the US would be a positive development for the Federal Reserve, as it would not only reduce the possibility of what would be a fourth consecutive 50 basis point rate hike in September (the 50 basis point hikes basis points in June and July are considered a given), but it would also reduce pressure on the Federal Reserve to continue to hike rates aggressively in the fourth quarter of 2022 and 2023. A less aggressive outlook from the Fed would undermine the US dollar and would boost risk appetite, a bullish combination for GBP/USD. If the bullish scenario plays out, traders will look for resistance in the 1.2700 area, even from the 50 DMA.
Technical levels
Source: Fx Street
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