Due to a hawkish reassessment of Bank of England (BoE) rate expectations, supported by strong UK inflation and PMI figures surpassing expectations, GBP had a generally positive start to the year, gaining ground against nearly 80% of 50 global currencies. The positive momentum continued into February, making GBP the best performing G10 currency year-to-date, until a substantial US jobs report last Friday disrupted markets and led to a sharp decline in GBP/USD.
As anticipated, the BoE maintained unchanged interest rates last week but abandoned its tightening bias, signalling a potential shift towards rate cuts. While the market initially showed limited reaction, a turbulent Friday following the US jobs report saw the pound plummet by nearly two cents, dropping from around GBP/USD 1.28 to approximately GBP/USD 1.26. This marked the worst week for GBP/USD since early December. With expectations of US-UK yields converging, the likelihood of reaching a new high in 2024 in the short term seems slim. There is even a possibility of a downward breakout towards the 50-week moving average, positioned closer to GBP/USD 1.25.
The absence of significant data this week implies that geopolitical developments and sentiment are likely to steer trends in the foreign exchange market. Consequently, USD exhibited strength this morning, especially following the US-initiated retaliatory airstrikes in the Middle East over the weekend. While monitoring global events, attention will also be directed toward certain domestic occurrences. The British Retail Consortium's retail sales report on Tuesday, a set of housing data on Wednesday, and various BoE officials speaking throughout the week will be noteworthy. Additionally, caution is warranted regarding the GBP's positioning risk, as speculative bets on GBP appreciation are currently stretched well beyond their long-term average. Any unwinding of these positions could hasten the decline in GBP cross rates.
