GBP/USD bulls move in to fortify 1.2050
- GBP/USD bulls move in as traders get set for the Fed this week.
- UK politics are a potential weight for the pound going forward.
GBP/USD is higher in the midday New York session by some 0.37% after rallying from a low of 1.1960 to a high of 1.2086 on the day so far. The US dollar is down vs. a basket of rivals to start the week while traders get set for this week's showdown in the Federal Reserve interest rate decision.
The expectations of 75 basis points this Wednesday are throwing into question whether the US economy is able to sustain continued rate hikes at such a pace. A hike of that magnitude would effectively close out pandemic-era support for the economy and data of late has not been encouraging.
On Friday, the US Composite PMI Output Index fell far more than expected to 47.5 this month from a final reading of 52.3 in June indicating the US could be headed for a recession. However, the greenback found some support from safe-haven flows late on Friday while investors' stepped aside from stocks on the back of some weak earnings reports. Meanwhile, to start the week, pre-Fed jitters are keeping the greenback off its highs.
Domestically, net short GBP positions edged lower last week as per the latest positioning data shows as the pound finds itself caught up in political turmoil again. The UK will have a lame duck PM until September when a new leader will be announced and the uncertainty of a farm cloud over the currency and pound-denominated investments.
As analysts at Rabobank explained, ''it remains to be seen if the UK government, under new leadership can address the concerns that have been dogging GBP investors in terms of opportunity and growth for post-Brexit Britain. Presented with a worsening in the cost-of-living crisis, it is far from certain that a new PM in the UK will be able to substantially alter the gloomy tone that has been weighing on GBP all year.''
''Given our expectation that USD strength is likely to persist for around 6 months or so in view of risks to global growth, we foresee the potential for further sharp drops in the value of the pound,'' the analysts argued. ''We have revised lower our target for cable from 1.18 and see the potential for a dip to levels as low as 1.12 on a 1-to-3-month view.''