• GBP/USD recovery stalled amid rebound in U.S. yields 
• Consolidation could see chart support at 1.23 retested 
• U.S. PMI & Fed policy in focus amid quiet UK calendar 

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The Pound to Dollar exchange rate rallied through much of last week but its recovery was curtailed on Friday and the risk is now of a consolidation leading to a retest of technical supports near and around the 1.23 level.

Dollars were sold widely at times last week while the Pound also appeared to be sought after in what may have been the result of the prior week's aggressive increase in market expectations for the Bank of England (BoE) Bank Rate.

But the Pound-Dollar rate was turned away from 1.25 on Friday as U.S. government bond yields rallied after non-farm payrolls employment was reported to have risen much further than expected for last month with potential implications for the Federal Reserve (Fed) policy outlook. 

"There was something for everybody in the May jobs report. Fed hawks would have pointed to well above-trend 339k hiring as a reason to hike," writes Tom Kenny, a senior economist at ANZ, in a Monday research briefing

"Fed moderates and doves would have flagged the largest monthly percentage-point increase in the unemployment rate (0.3ppt to 4.7%) since 2010, excluding COVID-19, as a reason to skip or pause," he adds.

Above: Pound to Dollar rate shown at daily intervals with Fibonacci retracements of November 2022 rally indicating possible areas of technical support for Sterling while selected moving averages denote possible support and/or resistance.

Friday's job report followed a month of public commentary in which Fed officials introduced and mostly supported the idea of leaving interest rates unchanged for next week for the first time in more than a year and pending further information on the performance of the economy. 

Financial markets have continued to assume a further increase in interest rates is likely either in June or July, however, and whether that assumption survives this week's offering of U.S. economic data and next week's policy event will matter for the Pound to Dollar rate's recovery prospects.

"June policy decisions (Fed skip, ECB, BoE, BoC hikes and maybe even a modestly hawkish lilt from the BoJ) should work against the USD," writes Shaun Osborne, chief FX strategist at Scotiabank, in a Friday market commentary. 

"BoE tightening bets have moderated a little over the week but the potential for still significant policy tightening relative to the Fed and ECB over the next few months remains an important source of support for the GBP," he adds. 

The week ahead calendar offers little in the form of major appointments for the US and UK economies but Monday's release of the Institute for Supply Management Services PMI for May could impact U.S. interest rate pricing while monetary policy decisions in Australia and Canada may also affect the Dollar.

Above: Pound to Dollar rate shown at daily intervals with Fibonacci retracements of June 2021 fall indicating possible areas of technical resistance for Sterling while selected moving averages denote possible support and/or resistance.

Sterling would likely benefit if either of the Australian or Canadian interest rate decisions hamper the U.S. Dollar or if the U.S. Services PMI undermines the odds of another increase in interest rates from the Fed but beyond this point, UK economic developments will also become relevant again.

This is after Office for National Statistics data suggested late last month that homegrown inflation pressures strengthened further in the UK during April when they had been widely expected to moderate, leading to an aggressive upward revision to market expectations for the BoE Bank Rate. 

The uplift has seen the expected peak for Bank Rate rise from just less than 4.75% to almost 5.5% and has entirely offset the Dollar's earlier yield advantage over Sterling in the process, although some say market expectations have moved too far and left the Pound-Dollar rate vulnerable. 

"Market pricing for the path of the Funds rate over the next year is appropriate in our view. But we consider market pricing for rate hikes by the European Central Bank and the Bank of England has gone too far," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia. 

"Financial markets are currently pricing around 90bp of further tightening from the BoE while in our view only 50bp of further hikes will be delivered. However, there is no important UK economic data in the week ahead so market pricing may not change too much this week," Capurso adds.