GBP/USD pares Fed-induced rally below 1.2400 as UK worker’s walkout, downbeat data probe BoE hawks

• GBP/USD retreats from intraday high, consolidates the biggest daily gain in a week.
• Federal Reserve matched market consensus of 0.25% rate hike but mentioning of easy inflation, rate cuts drowned US Dollar.
• UK’s “Walkout Wednesday” appears just the start as unions eye more such shows, British Manufacturing PMI marked sixth consecutive contraction.
• BoE is up for 50 bps rate hike, attention should be given to statement suggesting future pace of rate lifts.

GBP/USD bulls take a breather around 1.2380, retreating from a three-day high, as the Cable pair buyers consolidate the biggest daily gains in a week ahead of the all-important Bank of England (BoE) monetary policy meeting.

The quote rallied heavily after the US Federal Reserve (Fed) Monetary Policy Statement mentioned that the inflation “has eased somewhat but remains elevated”. Adding to the GBP/USD pair’s upside were comments from Fed Chair Jerome Powell as he said “We can declare that a deflationary process has begun.” The policymaker also accepts the need for rate cuts during late 2023 if inflation comes down much faster. Even so, Fed’s Powell suggested that a couple more rate hikes are needed to reach it.

It should be noted, however, that the mixed US data and downbeat concerns surrounding Britain seemed to have probed the GBP/USD bulls afterward.

That said, US ISM Manufacturing PMI dropped to the lowest levels since June 2020 while marking 47.4 figure for January, versus 48.0 expected and 48.4 prior. Further, the ADP Employment Change also declined to a one-year low with 106K the latest figure compared to the 178K market forecasts and the upwardly revised previous figure of 253K. On the contrary, JOLTS Job Openings rose to 11.012M in December, crossing 10.25M consensus and 10.44M prior readings.

At home, the mass strikes by various workers' unions challenge the already struggling economy. “Up to half a million British teachers, civil servants, and train drivers walked out over pay in the largest coordinated strike action for a decade on Wednesday, with unions threatening more disruption as the government digs its heels in over pay demands,” said Reuters.

Furthermore, the S&P Global/CIPS UK Manufacturing PMI confirmed a consecutive sixth monthly contraction in factory output, with 47.0 figure versus 46.7 initial forecasts, which in turn weighed on the British Pound (GBP). “Weak demand from clients at home and abroad plus strong price inflation and a shortage of raw materials and staff all weighed on production. Brexit and port problems hurt exports while demand from China was particularly weak,” S&P Global said per Reuters.

Amid these plays, Wall Street rallied and the US 10-year Treasury yields slumped the most in two weeks while testing the lowest levels in a fortnight. On the same line were the US two-year Treasury bond coupons which poke 4.11% level at the latest. It should be observed that the US 10-year yields lick their wounds near 3.41% while the S&P 500 Futures print mild gains around the highest levels since August 2022, tested the previous day, by the press time.

Moving on, the BoE is expected to announce a 0.50% increase in its benchmark interest rate and the same is widely known, also appears priced in. As a result, the GBP/USD pair may witness a mild reaction in case of no surprises. However, major attention will be given to the language in the BoE Statement and Governor Andrew Bailey’s press conference to gauge the future of further rate increases.

Technical analysis

An eight-day-old resistance line near 1.2405 restricts immediate GBP/USD upside even as the upbeat oscillators and successful trading beyond the 21-DMA, at 1.2280 by the press time, challenge the Cable pair sellers.