The GBP/USD pair traded within a narrow range during the Asian session on Friday, hovering below the 1.3200 level.
While the latest US PCE data confirmed persistent inflation, it also led to a slight cooling of market expectations for Federal Reserve rate hikes, providing some temporary relief for the British pound. However, a resurgence in geopolitical risk following an attack on a cargo vessel in the Strait of Hormuz, coupled with renewed domestic political uncertainty in the UK, has capped the currency's potential for a rebound.
PCE Data and Shifting Rate Expectations
The US Personal Consumption Expenditures (PCE) price index report released on Thursday confirmed the ongoing nature of inflationary pressures. While the core PCE reading was largely in line with expectations, the stickiness in services inflation indicated that price pressures are not receding quickly.
Nevertheless, the recent decline in crude oil prices back to pre-conflict levels, following a preliminary peace agreement between the US and Iran earlier this month, has significantly eased concerns about an energy-driven inflation shock. This positive development has prompted traders to scale back bets on multiple Fed rate hikes this year, putting short-term pressure on the US Dollar Index and offering a period of support for GBP/USD.
However, the downside for the dollar appears limited. Market expectations for the Fed's policy path remain broadly hawkish, with Deutsche Bank forecasting two more rate hikes in September and December, and Bank of America taking an even more aggressive stance by predicting hikes in September, October, and December. With real yields remaining elevated, the dollar's overall strong position has not fundamentally changed.
Investors will need to monitor subsequent comments from Federal Reserve officials. Should inflation data continue to run hot, the dollar could stage a rapid recovery, limiting any further rebound in sterling.
Geopolitical Risk Resurfaces
Geopolitical tensions in the Strait of Hormuz escalated sharply on Thursday. Reports indicated that Iran's Islamic Revolutionary Guard Corps attacked a Singapore-flagged cargo ship, triggering a swift market reaction. Crude oil prices saw a modest rebound, and the geopolitical risk premium, which had significantly receded following the initial US-Iran peace deal, is being repriced into assets.
The United Nations International Maritime Organization has suspended related evacuation operations in the Strait of Hormuz, further highlighting the fragility of security in this critical waterway. This event not only threatens the security of roughly one-fifth of global oil shipments but has also reignited investor demand for safe-haven assets. The US dollar, as a traditional haven currency, has seen its appeal strengthen significantly, with the Dollar Index gaining once more and exerting clear downward pressure on non-dollar currencies, including the pound. Against this backdrop, the GBP/USD exchange rate faced selling pressure. Market concerns are growing that if disagreements between Iran and Western nations over control of the strait intensify, the risk of energy supply disruptions could push up global inflation expectations and reinforce the necessity for the Federal Reserve to maintain higher interest rates.
In the short term, geopolitical uncertainty is set to become a major factor driving currency market volatility. Investors should closely monitor subsequent developments and dynamics in the crude oil market. Should tensions persist, the dollar's strength is likely to continue, putting additional downward pressure on precious metals and risk assets.
UK Domestic Political Uncertainty
The pound is also facing political pressure from the domestic front. The resignation of UK Prime Minister Keir Starmer on June 22nd has formally opened the contest for leadership of the Labour Party, injecting a political risk premium into sterling.
While earlier market expectations for a swift internal consolidation within the Labour Party had provided some support for the pound, the formal start of the leadership contest means uncertainty will persist for the coming weeks. Investor caution regarding the policy direction of a new government is further limiting the pound's upside potential.
From a technical perspective, the daily chart for GBP/USD shows the pair has transitioned into a broader downtrend. After peaking at the 1.3867 and 1.3657 highs, the price has been on a sustained decline. The current exchange rate has fallen below the short-term 20-day moving average, with the 50-day and 100-day moving averages also trending downward, creating layers of resistance. The highs on the chart are progressively moving lower.
On the indicator front, the MACD is in bearish territory below the zero line, with the DIFF line consistently below the DEA line. The green histogram shows sustained bearish momentum. The RSI has retreated to 34.56, approaching the 30 oversold line, suggesting a potential for a minor technical rebound in the short term, though no clear bottom reversal signal has yet emerged.
As of 10:29 Beijing Time, the GBP/USD pair was quoted at 1.3183/84.
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