GBP/USD Sticks To Modest Gains Above Mid-1.24000s Supported By A Weaker U.S. Dollar
- GBP/USD pair extends gains above mid-1.24000s amid subdued U.S. dollar strength
- A combination of factors undermines the Greenback, exerting upward pressure on the GBP/USD pair
- Bets of a less aggressive Bank of England combined with disappointing UK PMI data undermine the British pound
The GBP/USD cross attracted some buying on Wednesday during the mid-Asian session, extending its earlier gains slightly above the 1.24260 level. The pair has managed to grow its modest rebound from the vicinity of the 1.23790 level and looks set to build its bullish momentum heading into the European session. A fresh leg down in U.S. Treasury bond yields on Wednesday from their highest levels touched since March was seen as a key factor that undermined the Greenback and helped cap GBP/USD pair against further gains. Apart from this, a modest rebound in the U.S. equity markets was another factor undermining the safe-haven Greenback.
In addition, uncertainty about the Fed’s next interest rate moves was also seen as undermining the Greenback. This comes after Fed officials recently shared mixed views on the size of the next interest rate hike, coupled with mixed dovish and hawkish commentary. Additionally, investors seem nervous and are shying away from riskier-perceived assets amid the lack of progress in the U.S. debt ceiling talks on Tuesday; this turned out to be another factor that undermined the Greenback.
Despite the combination of negative factors, the Greenback continues to be supported by firm market expectations that the Fed is less likely to halt its aggressive tightening campaign anytime soon. Apart from this, hawkish Fed rhetoric, signs of a potential recession in the U.S., sticky inflation, and more robust job growth all support the Greenback, suggesting the path of least resistance is to the downside for the GBP/USD pair. Further supporting the Greenback was the U.S. Census Bureau data on Tuesday which showed Sales of new single-family houses in the U.S. unexpectedly jumped 4.1% month-over-month to a seasonally adjusted annualised rate of 683K in April of 2023, the highest level since March last year, and compared to forecasts of 665K. Additionally, The S&P Global U.S. Services PMI increased to 55.1 in May 2023, up from 53.6 the month before and well above market expectations of 52.6, a preliminary estimate on Tuesday showed.
Shifting to the U.K. docket, the cable is undermined by market expectations of a less aggressive Bank of England (BoE) in the fight against inflation in the U.K. The bets were reaffirmed by stronger-than-expected unemployment figures in the U.K., which had jumped to the highest level since the period between November 2021 and January 2022. Further weighing down on the cable was the disappointing UK PMI data released on Tuesday by Markit. The S&P Global/CIPS UK Manufacturing PMI dropped to 46.9 in May 2023 from 47.8 in the previous month and below market expectations of 48, a preliminary estimate showed. Additionally, the U.K. Services PMI decreased to 55.1 in May 2023 from 55.9 in the previous month and below the market consensus of 55.5. The U.K. composite PMI readings for May also slipped to 53.9 from 54.9 the last month and below market expectations of 54.6.
As we advance, investors look forward to the U.S. docket featuring the GDP (QoQ) (Q1) data, Initial Jobless Claims data, and the Pending Home Sales (MoM) (Apr) data, all due for release later in the north-American session. In the meantime, the U.S. bond yields and broader market risk sentiment will influence the U.S. dollar and allow traders to grab some trading opportunities around the pair.
Technical Outlook: Four-Hours GBP/USD Price Chart
From a technical standstill, the price is auctioning near the 20-day (blue) Exponential Moving Average (EMA), which coincides with the 1.23450 resistance level. If Buyers manage to breach this ceiling, buying interest could gain momentum, paving the way for an ascend toward retesting the key resistance level plotted by a descending trendline extending from the mid-May 2023 swing high. A subsequent break above this resistance level could pave the way for a short rally toward tagging the 200 (yellow) and 50 (red) days Exponential Moving Averages (EMA) at 1.24530 and 1.24626 levels, respectively. If sidelined buyers join in from this seller congestion zone, it will rejuvenate the bullish momentum, provoking an extended rally toward confronting the 1.25085 resistance level. A decisive flip of this resistance level into a support level could pave the way for a further northward rally toward the 1.25460 resistance level.
On the flip side, if buyers decide to take their profits off the table, dip-sellers and tactical traders will trigger a bearish reversal toward the 1.23886 support level. If sellers manage to breach this floor, downside pressure could accelerate, paving the way for a drop toward retesting the key support level plotted by a descending trendline extending from the mid-May 2023 swing low. A break below this support level (bearish price breakout) could turn the GBP/USD cross vulnerable, paving the way for aggressive southside moves.