GBP/USD defends 1.1900 despite Downing Street’s political play, recession fears

• GBP/USD refrains from portraying the political crisis at home by posting mild losses at two-year low.
• Over 30 UK diplomats have resigned, 1922 Committee of backbench Tory MPs eye second no-confidence vote.
• Recession fears, hawkish Fed bets exert downside pressure but softer US data probed bears.
• US ADP Employment Change to decorate calendar, UK politics, Brexit drama more important for clear directions.

GBP/USD holds onto the late Wednesday’s bounce-off two-year low around 1.1925 as traders seek fresh clues during Thursday’s initial Asian session. The Cable pair dropped to the lowest levels since March 2020 the previous day as the UK’s political crisis joined Brexit woes and broad recession fears. However, the market’s anxiety ahead of today’s key data/events, as well as softer US statistics, appears to have probed the bears of late.

With over 30 resignations of the British diplomats, including the Chancellor, Health Minister and Tory Party Vice-Chairman, UK Prime Minister Boris Johnson is under immense pressure to step down, even if he rejects such push by some of the remaining Conservatives.

Recently, Michael Gove, one of the most senior ministers in the British government, earlier told Prime Minister Boris Johnson he must quit. 

Elsewhere, EU Commissioner for Interinstitutional Relations and Foresight Maroš Šefčovič said on Wednesday that the UK bill on altering the Northern Ireland Protocol is unacceptable.

On a broader front, the US 10-year Treasury yields bounced off a three-week low to 2.93% but the higher print of the 2-year bond coupon, around 2.99%, which in turn hints at the global recession fears. International Monetary Fund (IMF) Managing Director Kristalina Georgieva also said, per Reuters, “Global economic outlook has 'darkened significantly' since last economic update.” the IMF chief also added, “Cannot rule out the possible global recession in 2023.”

It should be noted that US ISM Services PMI for June dropped to 55.3 versus 55.9 in May. The actual figure, however, came in better than the market expectation of 54.5. It’s worth noting that the US JOLTS Job Opening for May declined to 11.25 million versus 11.00 million expected and 11.68 million prior.

The Federal Open Market Committee (FOMC) Minutes also favored the market pessimism as the Fed policymakers appear determined to announce another 75 basis points (bps) of a rate hike. That said, the latest Fed Minutes highlighted the need for the “restrictive stance of policy” while also saying, “even more restrictive stance could be appropriate if elevated inflation pressures were to persist”.

Looking forward, qualitative catalysts are likely to entertain GBP/USD traders ahead of the US ADP Employment Change for June, expected 200K versus 128K prior.

Also read: ADP Net Employment Change June Preview: Can employment stave off a recession?

Technical analysis

A two-month-old support line near 1.1765 seems to restrict short-term GBP/USD downside amid oversold RSI conditions. The corrective pullback, however, needs to cross the monthly resistance line, near 1.2090 by the press time, to recall the buyers.