GBP/USD analysis: Bulls at the mercy of USD price dynamics, eyes on BoE/US CPI

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  • Broad-based USD selling helped stage a goodish bounce on Wednesday.
  • The up-move seemed unaffected by dismal NISER UK Q2 GDP estimate.
  • Thursday’s focus will be on the BoE financial stability report and US CPI.

The GBP/USD pair took advantage of the broad-based US Dollar selling on Wednesday and bounced off six-month lows set in the previous session. The greenback took a sharp knock in reaction to the Fed Chair Jerome Powell’s prepared statement for the semi-annual Congressional testimony, reiterating the central bank will act as appropriate to sustain the US economic growth. Powell highlighted the risk that weak inflation will be persistent – more than the Fed currently anticipates and also acknowledged that uncertainties continue to dim the outlook.

Adding to Powell’s dovish remarks, the June FOMC meeting minutes revealed many policymakers judged that additional monetary stimulus would be needed soon and revived speculations of an aggressive rate cut. This was evident from a sharp intraday turnaround in the US Treasury bond yields, which exerted some heavy downward pressure on the greenback and assisted the pair jump back above the key 1.2500 psychological mark. 

The positive momentum seemed rather unaffected by the UK National Institue of Economic and Social Research (NIESR)’s release, indicating that the economy was on course to contract by 0.1% in the second quarter of the year. Earlier on Wednesday, the monthly GDP report showed that the UK economy expanded by 0.3% in May, having contracted 0.4% in the previous month, while goods trade deficit declined to £11.524 billion in May £-12.76 billion previous. Meanwhile, the UK manufacturing and industrial production staged a goodish rebound in May, though were slightly below market expectations.

The pair built on the overnight positive momentum and in absence of any negative Brexit headlines, climbed to the top end of its weekly trading range during the Asian session on Thursday. Moving ahead, market participants now look forward to the BoE’s financial stability report, which will be followed by a press conference, where comments by the BoE Governor Mark Carney will influence sentiment surrounding the British Pound. Later during the North-American session, the US Consumer inflation figures and the second day of Powell’s testimony might further collaborate towards producing some meaningful trading opportunities.

From a technical perspective, any subsequent recovery is likely to confront some fresh supply near the 1.2565-70 region, above which the momentum might get extended, though runs the risk of fizzling out rather quickly near the 1.2600 handle amid persistent fears of a no-deal Brexit. 

On the flip side, the 1.2500 handle, closely followed by the 1.2480 horizontal zone now seems to protect the immediate downside, which if broken might turn the pair vulnerable to break through the recent swing lows support near the 1.2440 region and head towards challenging yearly lows, around the 1.2400-1.2395 area. The mentioned region coincides with a four-month-old descending trend-channel and should act as a key trigger for any further near-term depreciating move.