GBP/USD hits fresh yearly lows under 1.2100 as weak UK data weighs on BoE tightening bets

  • GBP/USD remained under pressure on Tuesday, hitting fresh annual lows under 1.2100 though recently bouncing a little post-soft US PPI data.
  • The pair has dropped hard this week with soft UK data weighing on BoE tightening bets as Fed tightening bets rise.
  • The Fed and BoE’s policy announcements on Wednesday and Thursday are this week’s key events.

The pound remains under pressure on Tuesday, with GBP/USD dipping to fresh annual lows under 1.2100 to print lows in the 1.2070s, after the latest monthly UK labor market data release revealed the unemployment rate rose for the first time since 2020 in the three months to April. The pair was last trading lower by about 0.3% just under 1.2100, after finding support in the form of the May 2020 lows in the 1.2070s. Slightly weaker than expected US Producer Price Index data has helped it recover from lows in recent trade.

GBP/USD decline on Tuesday comes after the pair fell just under 1.5% on Monday as a result of safe-haven demand for the US dollar and after monthly GDP data showed the UK economy shrank in April. This week’s poor UK data has compounded fears about the UK economy being in or close to recession, with growth in the UK seen as likely to be amongst the weakest in the G20 this year. Fears about UK economic weakness go hand in hand with decreasing confidence about how much more monetary tightening the BoE can get away with, just as the Fed and ECB look likely to pivot in a more hawkish direction, hence sterling underperformance.

Indeed, the BoE is likely to only deliver a meager 25 bps rate hike on Thursday versus a 75 bps hike from the Fed on Wednesday. These two central bank meetings will be the main events of the week and GBP/USD risks falling under 1.20 if the divergence between the two’s monetary stance (the Fed being more hawkish and BoE less) is greater than expected. Wednesday’s US Retail Sales data will also be crucial in the context of recession fears, which have had an important impact on macro sentiment in recent sessions (also weighing heavily on sterling).

Another theme to watch this is rising UK/EU tensions over the former’s proposal to unilaterally alter the Northern Ireland Protocol, which some think puts the post-Brexit trade deal and London’s financial equivalence with the EU at risk. This risk has also been weighing on sterling as of late.

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