GBP/USD hits multi-week lows near 1.2420 pre-US CPI as UK growth fears linger

GBP/USD hit multi-week lows on Friday in the low 1.2400s, with bears eyeing a push lower into the 1.2300s.

Near-term focus is on the upcoming US CPI release and whether it will impact Fed tightening expectations.

GBP/USD broke out to fresh multi-week lows in the 1.2420 area on Friday amid mixed FX market conditions and somewhat risk-averse pre-US inflation data trading conditions. The pair was last trading with losses of roughly 0.5% on the day, with bears eyeing a push lower into the 1.2300s in the week ahead should fears about the weakening UK economy linger.

According to a REC survey cited by Reuters on Friday, UK employers hired staff at the slowest pace since early 2021 in May, with the hiring pace having now declined for a sixth successive month. Sterling also has domestic politics to worry about, with the UK government reiterating its intention to pass legislation that would unilaterally amend the Northern Ireland Protocol (putting the UK’s free trade deal with the EU at risk) and with UK PM Boris Johnson’s authority having been weakened after a no-confidence vote on Monday that saw a larger than expected rebellion from his own MPs.

In the near-term, focus will be on US Consumer Price Inflation data scheduled for 1230GMT and analysts think that the data might ease inflation worries, which could (at the margin) relieve some pressure being felt by the Fed to tighten monetary policy so quickly in the quarters ahead. This could provide GBP/USD with some short-term support. But given Fed/BoE policy divergence and a comparatively weak UK growth story, traders may be inclined to sell any sterling rallies.

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GBP/USD rallies to near two-week high, eyeing 1.2500 ahead of US data/Fed's Powell

A combination of factors prompted aggressive short-covering around GBP/USD on Tuesday.

The British pound drew support from better-than-expected domestic employment figures.

A turnaround in the risk sentiment undermined the safe-haven USD and remained supportive.

Investors now eye the US Retail Sales for a fresh impetus ahead of Fed Chair Powell’s remarks.

The GBP/USD pair added to its strong intraday gains and shot to a nearly two-week high, around the 1.2480 region during the first half of the European session.

The British pound strengthened across the board on Tuesday after the UK Office for National Statistics reported that the number of people claiming unemployment-related benefits dropped by 56.9K in April. This was well below expectations for a fall by 38.8 and the 46.9K decline reported in the previous month. Adding to this, the ILO Unemployment Rate in the UK edged lower to 3.7% in three months to March from 3.8% prior.

Apart from this, the ongoing US dollar profit-taking slide from a two-decade high assisted the GBP/USD pair to build on its recent bounce from the 1.2155 region, or the lowest level since September 2020. Spot prices gained traction for the third successive day, taking along some short-term trading stops placed around the 1.2400 round-figure mark. The subsequent strength might have already set the stage for additional near-term gains.

That said, the UK-EU impasse over the Northern Ireland protocol could act as a headwind for sterling. UK Foreign Secretary Liz Truss will set out how the government plans to change the rules on goods moving between Britain and Northern Ireland and how it could override parts of the Brexit deal. Apart from this, the Bank of England's warning that the UK economy will slide into recession this year might cap gains for the GBP/USD pair.

Traders might also be reluctant to place aggressive bets and prefer to wait on the sidelines ahead of the key US macro data and Fed Chair Jerome Powell's appearance later this Tuesday. The US economic docket highlights the release of monthly Retail Sales figures. Meanwhile, Powell's remarks will be scrutinized for clues about the possibility of a 75 bps rate hike in June, which will influence the USD and provide a fresh impetus to the GBP/USD pair.

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GBP/JPY sticks to strong gains near two-and-half-week high, around 164.00 mark

GBP/JPY regained traction on Wednesday and was supported by a combination of factors.

Dovish remarks by BoJ’s Kuroda and the risk-on impulse weighed on the safe-haven JPY.

Hot UK consumer inflation figures underpinned sterling and provided an additional boost.

The GBP/JPY cross maintained its strong bid tone through the first half of the European session and was last seen trading near a two-and-half-week high, around the 164.00 mark.

Following the previous day's modest pullback, the GBP/JPY cross caught fresh bids on Wednesday and was supported by a combination of factors. The Japanese yen weakened across the board after the Bank of Japan Governor Haruhiko Kuroda reiterated to sustain the current powerful monetary easing to support economic recovery. Apart from this, the risk-on impulse - as depicted by a positive tone around the equity markets - undermined traditional safe-haven assets, including the JPY.

On the other hand, the British pound drew some support from hotter-than-expected UK consumer inflation figures. In fact, the UK Office for National Statistics reported that headline CPI jumped from 6.2% YoY in the previous month to 7% in March - the highest level since 1992. Adding to this, the Core CPI, which excludes volatile food and energy prices, rose to 5.7% YoY from the 5.2% reported in February. This was seen as another factor that provided an additional lift to the GBP/JPY cross.

With the latest leg up, spot prices have rallied nearly 150 pips from the weekly low, around the 161.60 region touched on Monday. Expectations that the BoJ will stick to its accommodative monetary policy stance should continue to act as a headwind for the JPY and supports prospects for a further near-term appreciating move for the GBP/JPY cross. Hence, a subsequent move back towards challenging the multi-year high, around the 164.65 region touched in March, remains a distinct possibility.

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