GBP/USD: Test of 1.22 Possible Says One Analyst

Above: Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.

The Dollar is not done and could push Pound Sterling to new lows in the current cycle warn analysts, but the prospect of some early May relief cannot be discounted.

The Pound to Dollar exchange rate lost one per cent in value during April, but losses had extended to 2.50% before a late-month recovery.

A recent relief rally back to 1.25 eases some near-term downside pressure, but analysts are looking for the selloff to resume and deliver lows not seen since last November ultimately.

"GBP/USD and EUR/USD can take their cue from USD. GBP/USD can test support at 1.2298 if strong US data and/or a hawkish FOMC pushes up U.S. yields and the USD significantly," says Kristina Clifton, a strategist at Commonwealth Bank.

The new month kicks off with the Federal Reserve interest rate decision, where policymakers are expected to sound less confident about the prospects of bringing inflation back to the 2.0% target anytime soon, meaning they will validate market expectations for later rate cuts.

Markets entered the year expecting up to 150 basis points of cuts, but this now stands at just 25bps following a rerating in expectations that has propelled the Dollar to the top of the 2024 performance charts. "The market has been pushing back its expectations for Fed rate cuts since the very start of this year. This has clearly supported the USD," says Jane Foley, Senior FX Strategist at Rabobank.

The first rate cut is now anticipated by December, but the market could push this back into 2025 if Fed Chair Powell and his colleagues warn inflation is going in the wrong direction, which can offer the Dollar further support.

"The FOMC is expected to leave the Funds rate unchanged. The focus of financial markets will be the post‑meeting statement and Chair Powell’s press conference. We expect Powell to be hawkish; the question is will he be more hawkish than market expectations. We would not be surprised if financial markets remove all rate cuts priced for 2024 this week, supporting the USD to lift above 107pts," says Clifton.

Most major USD-based currency pairs are in short- to medium-term downtrends against the Dollar, with the Pound-Dollar exchange rate's trend clearly visible:

Above: GBP/USD at daily intervals. Track GBP/USD with your own custom rate alerts. Set Up Here

"It is quite possible that there could be more downside in cable if speculators build short positions, but the 1.22 level will likely be a near-term floor," says Chester Notifor, a foreign exchange strategist at BCA Research.

The Dollar strengthened on April 30 after a measure of wages favoured by the Federal Reserve came in above expectations and added fresh evidence that inflationary pressures were building again.

U.S. labour costs rose by 1.2% in the first quarter versus the 1.0% expected. "The Q1 reading for the Employment Cost Index (ECI) was yet another data point suggesting that progress on inflation is stalling out," says Sarah House, an economist at Wells Fargo.

"The market reaction to yesterday’s release of the firmer than expected US Employment Cost Index reaffirmed widespread fears that Fed Chair Powell could signal a hawkish lean in today’s post-FOMC meeting press conference," says Rabobank's Foley.

But, Bullish USD Positioning Opens the Door to Disappointment

Wednesday's Federal Reserve policy decision will be followed by the non-farm payroll report at the end of the week, which will be the first of the major data releases from the U.S. for May.

The labour market has consistently beaten analyst expectations and markets are primed for another strong reading.

Given the already USD-hawkish setup of the foreign exchange markets, the bigger risks are to the downside on any unexpected weakness in the upcoming data.

Paul Robson, a foreign exchange strategist at NatWest Markets says the market "is clearly positioned" for a continuation of U.S. economic and USD dominance.

"That naturally ups the ante for US economic data to outperform a seemingly ever-rising bar," he says.

In short, big beats to the upside are now required to derive substantive Dollar advances, whereas small downside surprises can deliver meaningful moves to the downside.

While GBP/USD can still fall to a floor at 1.22, the prospect of some May relief cannot be discounted if some of the recent heat is taken out of the recent trend by more mundane economic releases.