- The GBP/USD is trading close to 1.3000, the lowest since September 2017.
- Everything is going against cable, with three critical drivers.
The GBP/USD is under the cosh, hardly holding onto 1.3000. These are the lowest levels since the first week of September last year. What is going on?
Here are three reasons for the fall:
1) UK inflation remains depressed
The fresh figures released now for June show that headline inflation is stuck at 2.4% YoY, below 2.6% expected. Core CPI also disappointed with 1.9% against 2.2% projected and 2.1% seen in the previous month. Producer prices also fell short of expectations.
Softer inflation may cause the Bank of England to pause for a thought. Before the publication, a rate hike in August, alongside the BOE’s Quarterly Inflation Report, seemed like a done deal. But if inflation is closer to the 2% middle ground of the 1-3% target, the doves may win over some of their peers and perhaps also Governor Mark Carney.
2) Precarious politics
The UK Government is surviving votes in the House of Commons on a day by day basis. Without an absolute majority, every soft-Brexit amendment and every hard-Brexit amendment push the government into a juggling act with MPs from the Conservative Party and also from the opposition Labour Party. The scramble resulted in breaking some ethics and with threats to go the polls.
Time is running out for reaching a Brexit deal and the UK is still negotiating with itself. The European Union has urged its members to prepare for a no-deal scenario. Brexit happens on March 29th, 2019 if there is no deal. Uncertainty for businesses weighs on Sterling.
3) Powell-powered USD strength
The fall of the GBP/USD is also driven by forces on the other side of the pond. The Chair of the US Federal Reserve Jerome Powell testified in front of the Senate on Tuesday and was very bullish on the economy. He sees stronger growth in Q2, a robust labor market that draws in discouraged people, confidence in inflation reaching its target and further rate hikes.
On the tricky topic of trade relations, Powell tip-toed to avoid any political polemics, even though it became evident he is not in favor of the higher tariffs. The markets took his warnings with a stride and focused on the bright side.
The US Dollar strength extended into today’s trading and Powell is projected to convey the same messages in the second part of his testimony, this time before a House committee.
All in all, the GBP/USD is under immense pressure and it is hard to see any immediate remedy.
The 1.3000 level is the obvious psychological support line, followed by 1.2860 which served as support back in August 2017. The next level to watch is 1.27875, a low point also back in August and the lowest in a long time.
On the upside, 1.3050 is now resistance, followed by 1.3100 and 1.3160, lines that separated the pair’s ranges recently.