GBP/USD rebounds from yearly low towards 1.1800 ahead of UK/US PMIs

• GBP/USD portrays short-covering moves after declining to the lowest levels since March 2020.
• US dollar pares some gains as traders await fresh clues, yields retreat from monthly top.
• Hopes of UK-EU deal of Northern Ireland Protocol, amid rising cost of living crisis, also underpin corrective pullback.
• Cable may print kneejerk reaction in case of strong UK PMIs, bears have higher chances of ruling.

GBP/USD licks its wounds as it grinds higher around 1.1780, after refreshing the 29-month low the previous day. In doing so, the Cable pair cheers the recently increasing odds that the UK and the Eurozone might agree on the Northern Ireland Protocol (NIP) amid a pullback in the US Treasury yields. Also allowing the quote to rebound is the cautious optimism ahead of the preliminary readings of the UK and the US PMIs for August.

“The UK government’s plan to tear up part of its Brexit deal with the EU and replace the Northern Ireland Protocol unilaterally will create a “myriad” of new problems, business leaders have warned,” said The Independent. The news also added that the Northern Ireland Business Brexit Working Group – which includes Logistics UK, CBI NI and Manufacturing NI – said soaring inflation mean there was an “urgent” need for compromise with Brussels.

On the other hand, the US Dollar Index (DXY) retreats from the monthly high, down 0.08% intraday near 108.87 at the latest. With this, the greenback’s gauge versus the six major currencies tracks the US Treasury yields as the benchmark 10-year bond coupons drop two basis points (bps) to 3.02% at the latest.

It’s worth noting that the DXY rose to the six-week high the previous day, and also printed a four-day uptrend, amid fears of recession and increasing hawkish Fed bets. The US dollar excelled after Chicago Fed National Activity Index improved to 0.27 in July, from a downwardly revised -0.25 prior. “Fed funds futures on Monday have priced in a 54.5% chance of a 50 basis-point (bp) rate hike at the Fed's policy meeting next month. The fed funds rate is seen hitting roughly 3.6% by the end of the year, with a peak rate of nearly 3.8% in March 2023,” mentioned Reuters following the latest market data.

Elsewhere, Russia’s unscheduled maintenance of the Nord Stream 1 pipeline unveiled a blow to the struggling Eurozone economy amid the energy crisis, which in turn underpins the US dollar’s safe-haven demand.

Against this backdrop, the S&P 500 Futures print mild gains even as Wall Street closed in the red.

Looking forward, the first readings of the UK’s S&P Global PMIs for August hint at softer prints and hence a positive surprise can be welcomed to extend the GBP/USD pair’s latest rebound. However, the Bank of England’s (BOE) pessimism and the hawkish Fed concerns keep the pair bears hopeful.

Technical analysis

A downward sloping trend channel from May 13, currently between 1.1630 and 1.2220, keeps GBP/USD bears hopeful of further declines. The corrective pullback, however, may approach the convergence of the 21-DMA and 50-DMA, around 1.2080 if managed to cross June’s low of 1.1933.