- GBP/USD reverses the previous day’s bounce off weekly low.
- Pause in yields appeared to have backed the pre-NFP US dollar rebound.
- BOE matched wide market forecasts but recession woes drowned cable before recovery moves.
- US employment numbers, China-linked risk catalysts also appear important for clear directions.
GBP/USD retreats to 1.2140 while reversing the previous day’s rebound from the weekly bottom during Friday’s Asian session. In doing so, the cable pair justifies the US dollar’s corrective pullback ahead of all-important US employment numbers for July.
On Thursday, the Bank of England (BOE) matched market forecasts by announcing the biggest rate hike since 1995 by increasing the benchmark rate by 50 basis points (bps) to 1.75%. Only one Monetary Policy Committee (MPC) member Silvana Tenreyro voted to hike the rate by 0.25 bps.
Despite the heavy rate lift the GBP/USD slumped nearly 100 pips as the Rate Statement revealed that the UK is projected to enter recession in Q4 2022 and the same is likely to last five quarters. The BOE also mentioned that the Gross Domestic Product (GDP) could fall by 2.1%.
While trying to tame the bears, BOE Governor Andrew Bailey said that parts of the UK economy are still going forward strongly, including in the job market. Even so, the policymaker said, “50 bp rate rise today does not mean we are now moving to a pre-determined path of raising rates by 50 bp per meeting.” BOE’s Bailey also added, “All options are on the table for the September meeting and beyond.”
It’s worth noting that the US Treasury yields continued to portray the risk of recession as the difference between the 10-year and 2-year bond coupons remain the widest since 2000. That said, the US 10-year Treasury yields closed near 2.069% while the 2-year counterpart dropped to 3.049% at the latest.
In addition to the yields, headlines surrounding China and Russia are also likely to have weighed on the GBP/USD price. Recently, the dragon nation’s heavy military drills near the Taiwan border gained major attention and challenges the global trade channel, which in turn should mark further strain on the supply chain and might create an imbalance in the oil supply-demand matrix. However, the same could also escalate the recession fears and may not be that effective. On the other hand, Russia’s sustained invasion of Ukraine has been old news and hence gained little attention from the markets.
Amid these plays, S&P 500 Futures print mild gains despite Wall Street’s mixed closing. Further, the US Dollar Index (DXY) rebounds to 105.87, snapping a two-day downtrend.
Moving on, GBP/USD traders should pay attention to the US NFP details for fresh clues. Also important will be the updates on the UK Prime Minister’s race and Brexit.
A daily closing below the three-week-old support-turned-resistance, at 1.2180 by the press time, directs GBP/USD towards the 21-DMA support level of 1.2035.