GBP/USD slips to mid-1.2500s, still well within recent ranges as traders mull UK politics/incoming US CPI data

• GBP/USD fell back to the mid-1.2500s but remains well within recent ranges as last week’s lows/the 21DMA offer support.
• UK PM Johnson’s no-confidence vote survival has been a key talking point this week, but hasn’t impacted sterling much.
• Currency markets are likely to remain subdued pre-US CPI on Friday.

Broad US dollar strength amid a rise in yields state-side has seen GBP/USD pull back to the 1.2550 are on Wednesday, where the pair is trading lower by about 0.3% on the day. However, the pair continues to trade nearly 1.0% higher versus the multi-week lows it posted on Tuesday in the 1.2430 area and is currently about 0.5% higher on the week.

Support in the form of last week’s lows in the mid-1.2400s and the 21-Day Moving Average in the 1.2480s has supported GBP/USD well so far this week and kept the pair trading well within recent ranges. Though UK politics has been a big talking point, with UK PM Boris Johnson surviving a Conservative Party vote of no-confidence on Monday, it does not seem to have shifted the dial much for the pair.

Though he held on to his position as party leader and PM, Johnson’s authority has arguably been weakened by a larger than expected rebellion by his MPs. Some FX analysts have said this might be a positive for sterling if recent events encourage the PM to bring forward tax cuts/increase fiscal stimulus, as this could modestly boost the weakening outlook for the UK economy.

UK households are facing the worst cost-of-living squeeze in more than a generation, with the government announcing back in May that support this year for low-income households would be increased to the tune of over £30 billion. Further stimulus measures might encourage the BoE to revise higher their very pessimistic growth forecasts for this year and next, thus encouraging a little more monetary tightening.

In the meantime, GBP/USD looks set to continue ranging between the mid-1.2400s to 1.2600 area as traders await the release of US Consumer Price Inflation (CPI) figures on Friday. If that data shows a further easing of US price pressures in May, then this could result in some paring back of Fed tightening bets and could perhaps help the pair test 1.2600 once again.