The GBPUSD exchange rate was at risk of testing fresh multi-week lows after Chinese data boosted demand for the dollar and confirmed expectations of a Federal Reserve hike in US interest rates. The GBP/USD pair recently collapsed to the vicinity of the 1.2307 support level, its lowest in two months and for three consecutive trading sessions. At a time when markets and investors are awaiting the reaction to a package of important economic data, whether from Britain or the United States.
According to Francesco Pessol, forex analyst at ING Bank, the recent correction in the dollar, fueled by the bipartisan US debt limit deal and a long weekend in many parts of the world, was short-lived. “What continues to offer a significant amount of support for the dollar is rising speculation in the market about another 25 basis point Fed hike in June,” he added.
The analyst highlights that the expected hike from the US Federal Reserve is now “priced in” with an implied probability of 64%, according to the Fed funds futures curve. Regarding upcoming Fed decisions, he explains: “If the Fed pauses in June, the markets are holding a 98% chance of a rally in July, while the rate is currently below 50 basis points for easing before the end of the year.”
It confirms that several major data releases, including US jobs data for May, ISM Services and June inflation figures, will play a crucial role in shaping the market’s view of the rally in June. Turning to the US debt limit deal, the analyst stated, “The deal is expected to be voted on by the House of Representatives today.” While both parties claim to have the numbers needed to get the deal approved by Congress, he notes, “a very thin margin may keep the markets a little nervous for a few more days.”
Overall, the risk-off sentiment appears to be mainly driven by disappointing manufacturing PMIs from China, which showed a decline to 48.8, indicating contraction territory and the lowest level since December 2022.
It also highlights that Chinese growth sentiment plays a crucial role in a potential dollar spin to European currencies, and the recent lull in the Chinese recovery narrative contributes to delaying such a spin. Overall, ING Bank says that the GBP/USD exchange rate can resist the stronger dollar better than its other peers and support is located around the 1.2275/2300 area, “which may hold temporarily.”
Meanwhile, the New Zealand dollar is the worst performing currency in the past week after the dovish surprise from the Reserve Bank of New Zealand last week. With regard to upcoming economic indicators, the analyst proposes to monitor CoreLogic’s house price data to measure the decline in real estate in New Zealand, highlighting that the inflation figures for April in Australia surprised the bullish trend, as it renewed expectations of raising the interest rate of the Reserve Bank of Australia. He notes that RBA Governor Philip Lowe stressed the bank’s reliance on data in his recent testimony.
- According to the performance on the daily chart below, the price of the GBP/USD currency pair is trying to stop the pace of its recent losses.
- It extended to the support level 1.2307, and after three trading sessions recently, it tried to breach this trend.
- The bulls will not regain control of the trend without moving towards the resistance level 1.2550 and 1.2630 again.
- This may happen if the results of the US economic data are less than the expectations of the markets.
On the other hand, if the dollar gained positive momentum from the US job numbers, the bears may find the momentum to complete the pace of its losses, which may reach the support levels 1.2330 and 1.2240, respectively.
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