Forex Market: GBP/USD steadies after mixed macro data, Fed Chair Powell’s testimony, BoE meeting now in focus

GBP/USD came off highs reached in the prior trading day and consolidated below the 1.2600 mark on Wednesday on stronger US Dollar and following the latest inflation data that came out from the UK.

A report by the Office for National Statistics showed earlier Tuesday that annual consumer price inflation in the United Kingdom slowed down to 0.5% in May from 0.8% in April, in line with market consensus. It has been the lowest inflation since June 2016, as cost of transport dropped 1.7%, while cost of recreational and cultural goods, restaurants and hotels as well as miscellaneous goods and services increased at a slower rate.

At the same time, annual core inflation, which does not take into account cost of volatile categories such as energy, food, alcoholic beverages and tobacco, decelerated to 1.2% in May from 1.4% in April. It has been the lowest core CPI inflation since October 2016.

Sterling received a boost at the start of the week after Britain and the European Union reached an agreement to step up trade negotiations, while British PM Boris Johnson said he expected both sides could strike a deal in July.

On the other hand, the US Dollar strengthened against major peers on Tuesday on upbeat US retail sales data, which added to optimism over a shift recovery in consumer spending, one of the main driving forces of the economy. Retail sales rose at a record monthly rate of 17.7% in May, well above market expectations, and rebounding after a 14.7% slump in April. Last month, sales of clothing soared by 188%, those of furniture by 89.7%, while sales at sporting goods, hobby, musical instrument and book stores jumped 88.2% compared to April.

US retail sales, excluding automobiles, also rose at a record monthly pace, by 12.4%, in May, recovering from a revised down record drop of 15.2% in April.

As of 7:25 GMT on Wednesday GBP/USD was inching down 0.02% to trade at 1.2570, after touching an intraday low of 1.2541 during early Asian session, or a level not seen since June 15th (1.2454).

From macroeconomic perspective, today’s focus will be on US housing data, scheduled to be released at 12:30 GMT. The number of housing starts in the country probably rose to 1.093 million units in May, according to market expectations, from the seasonally adjusted annual rate of 0.891 million in April. The latter has been the lowest level since February 2015.

The number of building permits probably increased to 1.225 million in May from an annual level of 1.074 million in April. The latter has been the lowest level since January 2015.

Market players will be also paying attention to Federal Reserve Chair Jerome Powell’s testimony on the bank’s semi-annual monetary policy report before the House Financial Services Committee at 16:00 GMT.

In his testimony at Congress yesterday Powell used a rather cautious tone, as he pointed out that production and employment would remain well below their levels before the pandemic for a long time. He also said there was a “reasonable probability” that more stimulus measures would be needed. According to Powell, a full-fledged recovery will probably not be observed until the COVID-19 crisis has been brought under control.

Meanwhile, Bank of England is expected to keep borrowing costs intact and to increase the scale of bond purchases by at least GBP 100 billion to GBP 745 billion at its policy meeting tomorrow.

Bond Yield Spread

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled 25.9 basis points (0.259%) as of 6:15 GMT on Wednesday, up from 24.5 basis points on June 16th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.2604
R1 – 1.2656
R2 – 1.2739
R3 – 1.2791
R4 – 1.2842

S1 – 1.2521
S2 – 1.2469
S3 – 1.2386
S4 – 1.2302

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