- GBP/USD oversold but risks further slippage
- Could find support near 1.2255, 1.2079 on the charts
- Chinese economy likely to help USD ahead of CPI data
- Adds new short-term headwind for GBP/USD
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The pound/dollar exchange rate crashed further into oversold territory on the charts last week, but is still at risk of further losses that could see it drop to 1.2255 or lower in the coming days. , as rising Chinese economic growth risks support the greenback ahead of the latest US inflation report. .
The pound capsized again against almost all of the peer currencies in the G20 contingent last week, thanks in part to a nearly 2% drop in the exchange rate between the pound and the dollar, which fell below 1, 25 to enter the new week barely trading above the round number of 1.23.
Last Thursday’s candid assessment by the Bank of England (BoE) of the difficulties likely to stalk the UK economy and their constraining implications for the interest rate outlook were key drivers behind the pound’s decline , although the dollar itself also rallied.
“Wednesday’s FOMC meeting and Friday’s US jobs report were arguably net negative for the greenback as they reduced tail risks around mid-term fund rate pricing. year,” said Zach Pandl, co-head of global currency strategy at Goldman Sachs.
“But even though Fed fears have eased, investors still face downside risks for European economies from the war in Ukraine, and for the Chinese economy from weaker-than-expected policy support. “, Pandl and his colleagues also said in a research briefing on Friday.
Above: Pound to dollar rate shown at daily intervals with spread – or gap – between UK and US government bond yields at 02 and 10 year intervals. Click on the image for a closer inspection.
Friday’s payrolls data showed a moderation in U.S. wage growth in a potentially dampening outcome for the inflation outlook in April, while Wednesday’s Federal Reserve (Fed) policy decision is also emerged as a tame influence for US bond yields and the dollar.
However, the inflationary economic implications of the European Union’s stalled move towards a Russian oil embargo and global market volatility have kept the dollar in the spotlight and now the US currency stands to potentially benefit from growing concerns over Chinese economic outlook.
“Much of the employment weakness is outside of the manufacturing sector and reflects the covid shutdowns. Premier Li’s comments suggest the situation is getting worse. The deterioration in the state of the Chinese economy has been and will remain a significant weight to AUD, NZD and CNH in the near term,” said Joseph Capurso, Head of International Economics at Commonwealth Bank of Australia.
All after Chinese Premier Li Keqiang was widely reported over the weekend for calling for authorities to step up efforts to save jobs and support households as they grapple with the fallout from lockdown measures. coronaviruses in major metropolitan centers including Shanghai and Beijing. .
“The employment situation is deteriorating with the rest of the economy. All April PMIs point to rising unemployment, despite government promises to support companies affected by zero-Covid policies,” says Craig Botham, China+ chief economist at Pantheon Macroeconomics.
Above: The US Dollar Index with Fibonacci retracements of the 2001 and 2017 downtrends indicating potential areas of near to medium term technical resistance to any further USD rally. Click on the image for a closer inspection.
The deteriorating economic backdrop and the government’s growing willingness to support Chinese growth pose a downside risk for the renminbi and an upside risk for the USD/CNH pair, which, in turn, implies continued headwinds for many others. currencies against the US dollar from the start of this week. .
“GBP/USD may remain weak this week on the back of a stronger dollar and concerns over the UK economy amid the energy price shock. There is downside support for GBP/USD at 1.2112,” CBA’s Capurso said during a research briefing on Monday. (Set your own exchange rate alert here).
International headwinds are an additional burden on the pound-dollar exchange rate ahead of Wednesday’s release of April inflation data from the US and Thursday’s release of first-quarter GDP figures from the UK. United, two highlights of the coming week for the dollar and the pound respectively. .
“We believe that based on BoE rates market prices remaining elevated (by around 75bps at least by year end) and the UK macro backdrop, there is has room for further losses in GBP towards at least 1.2250 in the coming days, although its collapse since late February is starting to look considerably stretched from a technical perspective,” warns Juan Manuel Herrera, strategist at Scotiabank, in a Friday reference to the GBP/USD pair.
Some consensus measures suggest that economists generally expect the core inflation rate to have accelerated from 0.2% to 0.4% in monthly terms in the United States in April, this which would be a useless result for market participants who might be looking for signs that inflation is leveling off.
Above: Rate of the pound against the dollar at weekly intervals with Fibonacci retracements of the 2020 uptrend and various extensions indicating potential areas of short and medium term technical support for the pound and resistance for the dollar . Shown next to the Relative Strength Index (RSI) measure of momentum. Click on the image for a closer inspection.
“Headline inflation could rise further in some cases, also depending on energy prices, but we expect core G10 inflation to start falling in the coming months and stop surprising investors. market expectations,” said Athanasios Vamvakidis, head of FX strategy at BofA Global Research. .
“We see two main market themes for the rest of the year, in addition to possible data surprises with inflation spikes and slowing growth. possible energy sanctions from Europe. Second, the Covid situation in China,” Vamvakidis and his colleagues said on Friday,
A peak and subsequent decline in the annual rate of inflation in the United States is crucial if the Fed is to be prevented from raising its interest rate at the rate that was at least temporarily ruled out in its monetary policy decision to May last week, which is becoming a key determinant of the outlook for the US dollar.
“A month of reading does not tell us much. We would like to see evidence that inflation is moving in a direction that gives us more comfort,” Fed Chairman Jerome Powell said following last week’s policy decision.
As I said, we now have two months where core inflation is a bit weaker, but we don’t take that as cause for reassurance. I think we really need to see that our expectations are met. This inflation is under control and starting to come down,” he added at Wednesday’s press conference.