GBP/USD portrays anxiety ahead of UK Q2 GDP above 1.2650 despite US Dollar’s retreat on Fed concerns

• GBP/USD struggles to defend the first daily gains in four at the lowest level in a week.
• Unimpressive US inflation favored Fed policymakers to claim victory after hard-run.
• Fears of UK recession tame Cable pair’s recovery ahead of Q2 UK GDP.
• US PPI, more inflation clues will also direct Pound Sterling price.

GBP/USD stays defensive beyond an 11-week-old rising support line, making rounds to 1.2680-90 heading into Friday’s London open. In doing so, the Cable pair justifies the market’s cautious mood of the first readings of the UK’s second quarter (Q2) Gross Domestic Product (GDP), expected 0.0% QoQ versus 0.1% prior, especially amid fears of British recession. However, the US Dollar’s retreat prods the Pound Sterling sellers of late.

That said, the US Dollar Index (DXY) fails to extend the late Thursday’s rebound from the lowest level in a week as a slew of policymakers from the Federal Reserve (Fed) conveyed the US central bank’s hard-earned victory on inflation. Even so, their tones appeared less convincing for doves and joined the risk-negative concerns about China to limit the Greenback’s fall and test the Cable buyers.

Among them, Philadelphia Federal Reserve Bank President Patrick Harker raised a toast to the Fed’s progress in its fight against inflation and was joined by Boston Federal Reserve President Susan Collins and Atlanta Federal Reserve Bank President Raphael Bostic to cheer the softer US CPI. However, San Francisco Fed President Daly turned down the cheers for their victory while saying, “There’s still more work to do.” 

On a different page, China allows the local governments to use the provincial-level governments to raise about 1 trillion yuan ($139 billion) via bond sales to repay the debt of local-government financing vehicles (LGFV) and other off-balance sheet issuers,  per Bloomberg. The news justifies the market’s confidence in the Chinese policymakers’ capacity to avoid recession and weigh on the US Dollar, via a slightly positive market mood.

It should be noted that the fears of witnessing more geopolitical tussles between the West and China, mainly due to the US restriction on investment in China technology companies and the likely repeat of the measures by the UK and European Union, weighed on the sentiment.

Further, the chatters about slower economic growth in top-tier economies and recession woes in China, Germany and the UK pushed back the US Dollar bears as well. Furthermore, the news that China’s leading realtor Country Garden braces for debt restructuring and the anxiety ahead of more US data also prod the optimists.

Earlier in the week, the UK’s leading thinktank National Institute of Economic and Social Research (NIESR) said, per The Guardian, that it would take until the third quarter (Q3) of 2024 for British output to return to its pre-pandemic peak.

Also to observe is the fact that the political struggle of the Tory party and the fears of higher inflation, coupled with the employment crunch and slower economic transition, also challenge the GBP/USD rebound ahead of the UK Q2 GDP.

Also read: UK Q2 Gross Domestic Product Preview: British economy forecast to stagnate despite BoE optimism

Apart from the UK GDP, the US Producer Price Index (PPI) for July, the preliminary readings of the University of Michigan’s (UoM) Consumer Sentiment Index (CSI) for August and the UoM 5-Year Consumer Inflation Expectations for the said month will also be important to watch for clear directions of the GBP/USD pair.

Technical analysis

A three-week-old bearish trend channel restricts immediate GBP/USD moves between 1.2570 and 1.2790. Adding credence to the downside bias are the bearish MACD signals and downbeat concerns about the UK GDP.

That said, the Daily chart fine-tunes the moves by suggesting a sustained trading beyond the rising support line from late May, around 1.2655 by the press time.