GBP/USD plunges during the North American session after remarks by the US Federal Reserve (Fed) Chair Jerome Powell overshadowed words from the Bank of England (BoE) Governor Andrew Bailey, with both policymakers suggesting more tightening is needed amidst high inflation pressures. The GBP/USD is trading at 1.2645, down 0.81% or more than 100 pips, at the time of writing.
The GBP/USD extended its losses due to a risk-off impulse, as shown by US equities trading in the red. Hawkish comments by Federal Reserve (Fed) Chair Jerome Powell, saying the dot-plots are foreseeing additional tightening, bolstered the US Dollar (USD). Powell justified further tightening based on the latest US economic data that showed the resilience of the US economy, as he said that policy “has not been restrictive for long.” He added the Fed needs to see more softening in the labor market.
Aside from this, the BoE Governor Andrew Bailey said the UK economy had shown signs of resilience. Bailey added, “Data has shown clear signs of persistent inflation,” and said he would do “what is necessary to get inflation to target.” The BoE Governor added, “The market, I don’t think, thinks we’re nearly done at the moment. They’ve got a number of further increases priced in for us. My response to that would be: ‘Well, we’ll see.”
Powell’s comments underpinned the greenback, as seen by the US Dollar Index (DXY). The DXY, a basket that measures the buck’s performance vs. six currencies, advances 0.44%, at 102.964, so far unable to crack the 103.000 mark, capped by falling US Treasury bond yields.
In the meantime, expectations for a 25 bps rate hike in July jumped, as shown by the CME FedWatch Tool, with odds at 84.3%, above June’s 27 76.9%.
The US economic agenda featured the US Trade deficit contracted by 6.1% to $-91.1 billion, vs. April’s $-97.1 billion, as shown by the US Department of Commerce. Sources cited by Reuters commented, “Even with the narrowing in May, the goods trade deficit is up by over 10% since March, and trade will likely be a drag on economic growth in the second quarter.”
The GBP/USD is shifting its bias to neutral after climbing from May 25 lows of 1.2308, which witnessed the pair reaching a new year-to-date (YTD) high of 1.2848. Since then, expectations that higher borrowing costs in the UK could tip the economy into a recession weighed on the Pound Sterling (GBP). That said, the GBP/USD has extended its losses, and as of writing, the pair tumbled below the 20-day Exponential Moving Average (EMA) at 1.2648, with sellers eyeing the 1.2600 mark. A daily close below the latter and the GBP/USD would slide towards the 50-day EMA at 1.2541. In the case of GBP bulls eyeing to recover the lost ground, they must reclaim 1.2685 to remain hopeful of conquering 1.2700.
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