The British pound weakened against the US dollar on Thursday, as the greenback rallied across the board amid higher inflation expectations and bond yields. The GBP/USD pair extended its decline from the 1.2680 area, which was the highest level since April 2022, and touched a fresh weekly low of 1.2565 in the European session.
What is driving the GBP/USD pair?
The GBP/USD pair is influenced by various factors, such as economic data, monetary policy, political developments, and market sentiment. Here are some of the main drivers of the pair’s recent movements:
US inflation and bond yields
One of the key factors that boosted the US dollar on Thursday was the rise in inflation expectations and bond yields. The US 10-year Treasury yield climbed to 1.7%, the highest level since March 2022, as investors anticipated higher inflation in the coming months due to the massive fiscal stimulus and vaccine rollout.
The US consumer price index (CPI) for April, which will be released on Friday, is expected to show a jump of 3.6% year-on-year, the highest since September 2011. A higher-than-expected inflation reading could fuel expectations of a sooner-than-expected tapering of the Federal Reserve’s asset purchases, which would support the US dollar.
UK economic outlook and Bank of England
Another factor that weighed on the British pound was the mixed economic outlook for the UK. On one hand, the UK economy showed signs of recovery in March, as GDP grew by 2.1% month-on-month, beating market expectations of 1.3%. The growth was driven by a rebound in services, construction, and manufacturing sectors, as lockdown restrictions eased.
On the other hand, the UK faces some challenges ahead, such as the uncertainty over the post-Brexit trade relations with the EU, the risk of new coronavirus variants, and the possibility of a Scottish independence referendum.
The Bank of England (BoE) kept its monetary policy unchanged at its meeting last week, but upgraded its growth and inflation forecasts for 2021 and 2022. The BoE also signaled that it would slow down its pace of bond purchases, but stressed that this was not a change in its stance and that it would maintain an accommodative policy until there is clear evidence of a sustained recovery.
The BoE’s cautious tone contrasted with the more optimistic outlook of some other central banks, such as the Bank of Canada and the Reserve Bank of Australia, which have hinted at scaling back their stimulus measures sooner than expected.
What is next for the GBP/USD pair?
The GBP/USD pair could face more volatility in the near term, as it reacts to new economic data and market sentiment. Some of the key events to watch are:
– The US CPI report for April on Friday, which could have a significant impact on inflation expectations and bond yields.
– The UK GDP report for Q1 on Wednesday, which could show a contraction of 1.6% quarter-on-quarter due to the lockdown measures in January and February.
– The UK employment report for March on Tuesday, which could show a slight improvement in the labor market conditions.
– The UK inflation report for April on Wednesday, which could show a rise of 1.5% year-on-year, still below the BoE’s target of 2%.
– The UK retail sales report for April on Friday, which could show a strong rebound of 4.5% month-on-month due to the reopening of non-essential shops.
The technical outlook for the GBP/USD pair remains bearish in the short term, as it trades below its 20-day and 50-day moving averages. The pair could test the support level at 1.25, which coincides with the lower boundary of a descending channel that has been forming since late February. A break below this level could open the door for further losses towards 1.24 or 1.23.
On the upside, the pair could face resistance at 1.26, which is near the mid-point of the channel and also a psychological level. A move above this level could trigger some short-covering and push the pair towards 1.27 or 1.28.