GBP/USD continues to trade sub-1.2900 pre-US open as UK data dampens BoE tightening outlook

• GBP/USD continues to trade below 1.2900 and eye a test of November 2020 lows at 1.2850.
• The slid from above 1.3000 in wake of poor UK Retail Sales, Consumer Confidence and PMI data earlier this session.
• Further evidence of weak consumption/consumer sentiment undermines the argument for further aggressive BoE tightening this year.

GBP/USD continues to trade to the south of the 1.2900 level ahead of the start of US trade, with the pair having dumped more than 1.0% from above 1.3000 earlier in the morning following abysmal UK data. The pair hit its lowest since Q4 2020 in the 1.2960s at one point and came close to testing November 2020 lows at 1.2950. Longer-term bears might now wait for the pair to retrace back towards the upper 1.2900s and look to test support turned resistance just under 1.3000 before adding to short positions once again.

To recap Friday’s UK data, Retail Sales collapsed 1.4% MoM in March, much larger than the expected 0.3% MoM decline, while UK GfK Consumer Confidence in April printed its second-worst reading since records began 50 years ago. Flash April PMI survey results also missed expectations across the board, with the batch of data out on Friday together collectively reflecting the impact of a worsening cost-of-living crisis in the UK as consumers are squeezed on all angles by falling real wages and higher taxes.

Analysts warned that consumer health and consumption in the UK could fall further later this year, which could undermine the case for significant further policy tightening from the BoE, where policymakers are becoming more and more concerned about economic weakness as a result of the cost-of-living squeeze.

Analysts have been warning for some time that money market pricing, which currently points to another 167bps of BoE rate hikes this year, is excessive. As this becomes more and more the market’s consensus view, the case for a sustained break back above 1.3000 for GBP/USD is significantly weakened.

Growing discontent with the UK PM Boris Johnson within his Conservative party is another theme that could provide some downside risks for the pound. Some of the party’s MPs have reportedly been drafting so-called “no confidence” letters to submit if regional election in May go badly (as expected), in wake of the PM being fined by the police over the “partygate” scandal where he broke his own lockdown rules.