GBP/USD recovers some poise, rebounds back above 1.3150 and into green despite BoE dovishness

• GBP/USD has recovered from post-BoE lows in the 1.3100s and is back in the green above 1.3150.
• The pair hasn’t yet been able to get back to pre-BoE levels at 1.3200 as traders mull the dovish meeting.
• BoE dovishness coupled with headwinds to the global economy as a result of the Russo-Ukraine conflict will continue to weigh.

Whilst the pair has regained a modicum of poise in recent trade after rebounding from support in the 1.3100 level since the start of US trade to back above 1.3150 amid a weakening US dollar, GBP/USD has been unable to recover back to pre-dovish BoE hike levels in the 1.3200 area. Nonetheless, at current levels in the 1.3160 region, cable is back to trade higher by 0.1% on the day and is no longer the worst-performing G10 currency of the day, as it was in the immediate BoE aftermath. The US dollar has taken that crown in recent trade, despite strong US weekly jobless claims report and an inflationary March Philly Fed survey results which reaffirmed the economic themes that motivated the Fed to turn more hawkish on Wednesday.

Despite recent USD weakness, analysts have cooled on GBP in wake of the latest BoE policy announcement and this may impact cable’s ability to get back above 1.3200 this side of the weekend. “In contrast to both the Fed and the ECB, the BoE delivered a relatively dovish message to investors today,” said a senior analyst at Aviva Investors, adding that “there was more of a focus on slower growth and its impact on households going forward”. Investors also interpreted the vote of one BoE rate-setters voted to leave rates on hold and the newly worded guidance on further rate hikes as more dovish than expected.

Money markets have pared back on BoE tightening bets for 2022, and now see the bank hiking rates another four times in 2022 rather than another five as was expected before the policy announcement. Many analysts see these tightening expectations as overly hawkish and out of sync with the BoE’s new statement that “some further modest tightening might be appropriate in the coming months”. Going forward it thus seems likely that dovish BoE vibes will act more as a headwind to GBP, particularly versus the USD amid the more hawkish Fed. With the pair failing to get back above a key area of resistance in the upper 1.3100s now for a second successive weak, traders might now be upping bets on a move back to annual lows in the 1.3000 area.

Of course, geopolitics will be a key driver of short-term sentiment as has been the case over the last few weeks. Reports regarding the possibility of a Russo-Ukraine peace agreement have been mixed/conflicting. Whilst a peace deal (not most analysts base case) would be a positive surprise that could boost GBP/USD in the short-term (via USD weakness/GBP strength amid risk appetite), it’s unclear whether this would lead to a lasting rebound. Certainly, the West is going to continue with efforts to economically decouple with Russia (via sanctions, etc.) meaning that severe disruption to the global economy (to which the UK is more exposed versus the US) isn’t going to be cured with a peace deal.