GBPUSD at risk of extending declineAs recent consolidation comes to an endChinese data disappoints, driving USD demand
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The Pound to Dollar exchange rate (GBPUSD) was at risk of testing new multi-week lows after Chinese data prompted increased demand for the Greenback and expectations for further Federal Reserve rate hikes firmed.
According to Francesco Pesole, FX Strategy at ING Bank, the dollar's recent correction lower, fueled by the U.S. debt limit bipartisan deal and a long weekend in many parts of the world, was short-lived.
"What is still offering a good deal of support to the dollar is the market's rising speculation for another 25bp hike by the Fed in June," he says in a recent note.
GBPUSD rose to 1.2447 on Tuesday but was lower again at 1.2361 as markets navigated the final day of May.
Pesole highlights the Fed's expected hike is now 'priced in' with a 64% implied probability, according to the Fed Funds futures curve. Regarding the upcoming Federal Reserve decisions, he explains:
"Should the Fed pause in June, markets attach a 98% probability to a hike in July, while currently price in less than 50bp of easing before the end of the year."
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He emphasizes that several key data releases, including May's jobs data, ISM services figures, and inflation figures in June, will play a crucial role in shaping the market's view on a June hike.
Turning to the U.S. debt limit deal, Pesole states, "The deal is expected to be voted on by the House today." While both parties claim to have the numbers to get the deal approved by Congress, he notes, "the very tiny margin may be keeping markets a bit jittery for a few more days."
Pesole also says Chinese data is providing the Dollar with an additional boost midweek:
"The risk-off sentiment seems to be primarily driven by disappointing manufacturing PMIs out of China," which showed a drop to 48.8, indicating contractionary territory and the lowest level since December 2022.
Above: GBPUSD at daily intervals.
He further highlights that Chinese growth sentiment plays a crucial role in the potential rotation from the dollar to European currencies, and the recent cooling off of the Chinese recovery narrative is contributing to delaying such rotation.
"When combined with the ongoing hawkish repricing of Fed hawkish expectations, we think the dollar can hold on to gains for the time being," says Pesole, "elsewhere, AUD and NZD are the most exposed currencies in G10 to poor Chinese data."
ING says the Pound to Dollar exchange rate (GBP/USD) can better resist the stronger dollar than other peers and support is located around the 1.2275/2300 area, "which may hold temporarily".
The NZD is meanwhile the worst-performing currency of the past week after the dovish surprise from the Reserve Bank of New Zealand last week.
In terms of upcoming economic indicators, Pesole suggests monitoring the CoreLogic house price data to gauge the property slump in New Zealand, while highlighting that April's inflation numbers in Australia surprised on the upside, revamping rate hike expectations for the Reserve Bank of Australia. He notes that RBA Governor Philip Lowe stressed the bank's data dependency in his recent testimony.
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