GBP/USD looks set to end the week at two-year lows in the 1.2160s, falling a further 0.3% on Friday to take weekly losses to around 1.4%. That takes cable’s losses in the past four weeks to a staggering approximately 7.0%. The US dollar has been picking up across the board in the lead-up to the start of the US trading session.
GBP/USD was weighed heavily this week not just by the strong safe-haven US dollar amid risk-off market conditions as markets continued to bet on aggressive Fed tightening, but also a combination of bearish factors emanating from the UK and Europe. Firstly, Brexit has been back in the headlines with the UK and EU still at loggerheads over the Irish/Northern Irish border.
The UK is threatening to scrap the post-Brexit arrangement (the Northern Ireland Protocol), but the EU is saying if they do that, they will scrap the entire post-Brexit trade deal they have with the UK. Traders have thus been upping political risk premia over the past few days and a resolution doesn’t appear likely any time soon.
Meanwhile, the euro came under severe pressure on Thursday amid a number of bearish geopolitical developments relating to relations and trade (particularly in energy with Russia). Long story short, Russia is angry that EU member nations Sweden and Finland want to joining NATO, has sanctions on various European gas companies (to which they are now no longer sending gas) and gas going through Ukraine is also facing disruption.
This weighed heavily on the typically quite closely correlated British pound, though the pound also still has domestic economic woes to contend with. Data out on Thursday revealed a surprise contraction in UK GDP in March and comes off the back of an even uglier Retail Sales report for the same month, both of which reflect the economic bite of the worst cost-of-living crisis in the UK in decades.
Worries about UK economic weakness (many economists are forecasting a slip into recession this year) stoke worries that the BoE won’t be able to tighten policy much more. While a few BoE hawks are still pushing for more tightening, they may increasingly find themselves in a minority on the Monetary Policy Committee (MPC). The UK’s relatively weaker economic outlook and relatively more dovish outlook for central bank tightening versus the US thus has been a key reason for the decline these last four weeks, and will probably send the pair lower yet.
The next key level of support to the downside is the May 2020 lows in the 1.2050 area and, beyond that, it’s a clear run all the way lower to the 2020 lows in the mid-1.1400s. Calling a test of this level might be a bit premature (maybe the US economy will underperform in H2 this year, and USD weaken..?), but GBP/USD moving under 1.2000 looks very much on the cards in the not too distant future.
The key market events that GBP/USD traders will be watching next week will be the appearance of multiple BoE MPC members at a parliamentary hearing on Monday, followed by UK jobs data, US Retail Sales data and a speech from Fed Chair Jerome Powell on Tuesday. On Wednesday, UK April Consumer Price Inflation data is out, followed by UK April Retail Sales figures on Friday. Fed speak and a few more BoE speakers are scattered throughout the week.
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