Yesterday, GBP/USD dropped to $1.23, marking a fresh 23-week low just below the 100-week moving average. Despite a solid start to the week for global equities and a decline in oil prices, GBP faced widespread selling pressure. This came as investors digested the dovish remarks made by Bank of England (BoE) policymaker Dave Ramsden regarding inflation and monetary policy.
Recent increasingly dovish sentiments from BoE decision-makers have led investors to anticipate an earlier BoE rate cut, with the possibility of multiple cuts throughout the year. Presently, markets are fully pricing in two quarter-point rate reductions and a more than 25% chance of a third cut by the end of the year. The forecast suggests the first cut could occur in June instead of August. There's potential for further adjustment in market expectations, particularly if more BoE officials echo this dovish stance, possibly including the BoE's chief economist Huw Pill, who is expected to make remarks today. Moreover, the UK's headline CPI is now lower than that of the US for the first time in two years, amplifying prospects of an earlier rate cut by the BoE compared to the Federal Reserve . Consequently, UK two-year yields have dropped by 20 basis points since last Wednesday's UK inflation report, while US yields have stabilized at six-month highs around 5%. These factors are exerting considerable downward pressure on the GBP/USD pair. Market expectations for BoE rate cuts may align more closely with those of the European Central Bank (ECB), further heightening downside risks for GBP/EUR. The pair reached its lowest level since January yesterday, breaching its key 200-day moving average support.
Todays the primary data release will be the global flash Purchasing Managers Index (PMI) figures by S&P will be unveiled. Recent manufacturing indicators, especially in the US, have shown positivity. Consequently, investors are keenly observing for indications of improvement in regions beyond the US to potentially moderate the strength of the USD. Last month saw all three sector UK PMI reporting increased activity for the first time since June 2022, and a continuation of this trend will be crucial in offering support to GBP.
The EUR remains under pressure, hovering near $1.0600, marking its second decline in three days, with investors eagerly awaiting the upcoming release of flash PMIs this morning. Meanwhile, the European STOXX 50 index gained 0.3%, reflecting a calming of last week's geopolitical tensions, while the yield on the 10-year German Bund stabilized above the 2.5% mark, hitting its highest level since November 27.
