GBP/USD slides back below 1.2500 with Fed speak/minutes in focus

• GBP/USD has fallen back under 1.2500 on Wednesday as the dollar picks up pre-Fed speak/minutes and post-Tuesday's weak UK PMIs.
• The BoE/Fed policy differential remains a headwind, as do UK politics and UK/EU NIP tensions.

GBP/USD is back to trading below the 1.2500 level on Wednesday after failing to sustain a rally into the upper 1.2500s earlier in the day as the US dollar saw some dip-buying demand ahead of more Fed speak/minutes and US Durable Goods Orders data. The pair was last trading in the 1.2490s, down about 0.3% on the day, with traders also likely enticed to sell the earlier rally into the upper 1.2500s in lieu of Tuesday’s downbeat UK PMI data which reignited fears about UK economic weakness and cast further doubt about how much more the BoE can afford to tighten monetary policy.

BoE Chief Economist Huw did not react to the latest UK data in an interview published on Wednesday but did say that while he sees more tightening as needed, it won’t be necessary for the BoE to adopt a “super restrictive” policy stance. Pill highlighted the risks of overdoing tightening and worsening a recession versus the risks of not doing enough and allowing inflation to sustain momentum. By contrast, remarks from Fed Vice Chair Lael Brainard at 1615GMT followed by the release of the minutes of the Fed’s latest meeting at 1800GMT are expected to outline the Fed’s much more hawkish stance that significant further monetary tightening, including the possibility of taking interest rates well into restrictive territory, is likely.

That differential in central bank policy expectations may continue to block GBP/USD path high beyond the 1.2600 level. Indeed, the pair’s recent bullish trend looks at risk of breaking, which could open up the prospect of a dip back to its 21-Day Moving Average around 1.2425. A break below here would open the door to a move back to earlier monthly lows under 1.2200. Note that politics is also a potential headwind for sterling at the moment; UK PM Boris Johnson remains under pressure to step down with senior UK civil servant Sue Gray expected to publish a report on “partygate” later in the day. All the while, UK/EU tensions regarding the Northern Ireland Protocol (NIP) continue to bubble.