GBP/USD rebound approaches 1.2350 on softer USD, Brexit relief ahead of US inflation

• GBP/USD snaps four-day downtrend with mild gains around two-year low.
• UK PM Johnson gives last chance to EU before scrapping Brexit protocols over NI.
• UK think-tank suggests rate hike to 2.5%, expects firmer consumption due to pandemic savings.
• USD pulls back as yields retreat, sentiment improves amid mixed Fedspeak, hopes of easing CPI.

GBP/USD pares recent losses around the lowest levels since June 2020, up 0.13% intraday near 1.2330, during early Wednesday morning in Europe. In doing so, the cable pair prints intraday gains for the first time in five days as market sentiment consolidates amid pre-CPI caution, as well as due to mixed data/updates.

Other than the market’s capitulation, mainly due to the mixed comments from the Fed speakers and upbeat news from China, GBP/USD buyers also cheer a temporary Brexit relief. “Despite being closer to the Foreign Secretary, Nicholas Watt claimed Mr. Johnson wants one last push in which the EU needs to be less ‘theological’,” per the UK Express. “The news comes after EU leaders urged the UK Government to back down over the Northern Ireland Protocol,” adds the news.

Additionally, comments from the UK think-tank, shared by the Financial Times (FT) also favor GBP/USD prices as the news said, “While we expect consumption to grow overall due to households using their pandemic savings, aggregates can hide what’s happening at the disaggregate level.” The analysis also mentioned that the Bank of England will need to raise interest rates to 2.5% and keep them there until the middle of the decade in order to bring soaring inflation under control.

On a different page, headlines from Shanghai local authorities that mentioned no virus spread in eight districts and firmer inflation numbers from China also favored the latest improvement in the market’s mood. Additionally, lower yields probe the US dollar buyers ahead of the key data and hence add strength to the latest GBP/USD rebound.

That said, the Federal Reserve policymakers seemed to have weighed on the US Treasury yields of late. Earlier in Asia, Atlanta Fed President Raphael Bostic mentioned that the US economy is strong and demand is high while also expecting the neutral rate at 2.0-2.5%. Even so, Cleveland Fed President and FOMC member Loretta Mester kept the bears hopeful as she said, on Tuesday, that the Fed doesn't rule out a 75 basis points rate hike “forever”.

It’s worth noting that the US 10-year Treasury yields and the US Dollar Index (DXY) remain pressured at around 2.99% and 103.90 levels respectively whereas the S&P 500 Futures print mild gains near the 4,000 level after a mixed closing on Wall Street.

Looking forward, GBP/USD traders will keep their eyes on the Brexit headlines for fresh impulse but the US Consumer Price Index (CPI) figures, expected to ease to 8.1% YoY from 8.5% prior, will be crucial to follow.

Read: US April CPI Preview: Has inflation peaked?

Technical analysis

A downward sloping resistance line from April 21, around 1.2450, restricts the short-term recovery of the GBP/USD prices. The downside moves, however, remain doubtful unless breaking June 2020 low surrounding 1.2250.