GBP/USD struggles to cheer UK’s plan to cut VAT below 1.2200, US ISM PMI eyed

• GBP/USD fails to extend the corrective rebound from two-week low.
• No10 eyes reduction in VAT to battle inflation woes.
• Softer US spending, inflation weighed on the US dollar but broad pessimism put a floor under the fall.
• Fears of economic slowdown can keep grinding the pair lower, PMIs for June will be important for the day.

GBP/USD takes offers to refresh the intraday low around 1.2165, paring the biggest daily gains in a fortnight during Friday’s initial Asian session. In doing so, the Cable pair fails to cheer the news suggesting the UK government’s plan to ease the Value Added Tax (VAT) to counter the risk emanating from the price rise.

Prime Minister Boris Johnson's chief of staff Steve Barclay suggested reducing the 20% headline rate of the tax, The Times said, adding a temporary cut would reduce the tax bill for millions, per Reuters. The news fails to impress the GBP/USD buyers as the actual outcome is yet to witness and the official announcement is pending as well.

On the other hand, downbeat US personal spending and softer prints of the Fed’s preferred inflation gauge raised concerns over the health of the world’s largest economy and drowned the US dollar on Thursday. The greenback’s retreat could also be linked to the downbeat US Treasury yields as the benchmark 10-year bond coupons dropped below 3.0%, before bouncing off to 3.01% at the closing, to portray around 50 basis points (bps) of a fall from June’s peak.

That said, the US Dollar Index (DXY) reversed from a 12-day high to snap a two-day uptrend by closing the day around 104.75.

The recession fears, alternatively, kept the market’s risk appetite weak and weighed on the equities even as the yields were down and the dollar too.

It’s worth noting that the US Personal Income for May matched market forecasts and upwardly revised figures of 0.5% MoM but Personal Spending dropped to a three-month low, to 0.2% versus 0.5% expected and 0.6% downwardly revised previous readings. Further, the Personal Consumption Expenditure (PCE) Price Index reprinted 6.3% YoY figures for May.

More importantly, the Core PCE Price Index, the Fed’s preferred inflation gauge, matched expectations of 4.7% YoY versus 4.9% prior.

On the other hand, the final readings of the UK Gross Domestic Product (GDP) for Q1 2021 matched initial forecasts of 0.8% QoQ and 8.7% YoY.

Looking forward, the final reading of the UK S&P Global Manufacturing PMI for June precedes the US ISM Manufacturing PMI for the said month to direct intraday moves.

Also read: ISM Manufacturing PMI Preview: High inflation component steal the show, boost dollar

Technical analysis

Unless crossing a three-week-old resistance line, near 1.2250, GBP/USD remains vulnerable to refresh yearly low, currently around 1.1933.