Where we are: Cable currently trades at 1.2635, consolidating near the bottom of its recent range. Overnight, GBP/USD oscillated between 1.2620 and 1.2670. This level is significantly below yesterday’s NY close of 1.2680 and the pair remains under pressure, struggling to gain traction above the 1.2650 mark. Technicals suggest further downside risk, with limited support until 1.2580.
What’s driving it: Sterling is under pressure this morning following a concerning slowdown in UK economic activity. Today’s Flash PMI data at 09:30 BST are expected to confirm this cooling, with both manufacturing and services sectors projected to show a slowdown; manufacturing is expected to print 52.9 (prior 53.6) while services are expected to drop to 51.7 (prior 52.0). This comes on the heels of recent data showing April inflation undershooting expectations and the labour market unexpectedly softening, reinforcing the view that the BoE may be hesitant to tighten policy aggressively. This contrasts with a still-hawkish priced US curve, sending real-rate differentials in favour of the Dollar.
- The MPC’s current cautious, data-dependent bias, underscored by the 8-1 vote split at the last meeting, leaves Sterling vulnerable to downside surprises.
- Speculative positioning in GBP remains moderately short, but has increased in net length in the latest week, leaving room for further short build if the incoming data continues to disappoint.
- Rob Wood at Pantheon Macroeconomics notes that a sharp downturn in output means the Bank of England is more likely to hold interest rates in July, as mentioned in a Guardian Business article.
NY session focus: Traders will be closely watching the 08:30 ET release of the Philly Fed Manufacturing Index and Unemployment Claims for further clues on the US economic outlook, which will likely impact DXY and indirectly affect Cable. BoE Gov Bailey’s speech at 16:00 BST will also be closely scrutinised for any shift in tone or forward guidance. Key levels to watch are 1.2600 for a potential break lower and 1.2680 as immediate resistance. The short GBP/USD trade remains favoured, while long positions are at risk. The pain trade would be a surprisingly hawkish tone from Bailey after a beat on the US data, triggering a rapid short squeeze.