GBP/USD drops towards 1.2370 as BoE eyes urgent action ahead of UK inflation, US PMI

• GBP/USD takes offers to renew intraday low, extends the previous day’s pullback from 10-month high.
• Talks of BoE’s likely changes to deposit guarantee scheme, UK Chancellor Hunt’s fears from US subsidies weigh on Cable pair.
• Upbeat US data, Fed talks push back bets on rate cuts, policy pivot and underpin US Dollar’s corrective bounce.
• Slew of UK data, US PMIs to entertain GBP/USD traders during the week.

GBP/USD stands on slippery grounds as it extends the previous day’s pullback from a 10-month high to refresh an intraday low near 1.2390 during early Monday. In doing so, the Cable pair justifies the recent fears emanating from the UK, as well as the optimism surrounding the Federal Reserve (Fed), to tease bears after snapping a four-week uptrend.

“The Bank of England is considering a major overhaul of its deposit guarantee scheme, including boosting the amount covered for businesses and forcing banks to pre-fund the system to a greater extent to ensure faster access to cash when a lender collapses,” per the Financial Times (FT).  The news refreshes banking fears surrounding the UK and weighs on the Cable pair.

Also exerting downside pressure on the GBP/USD price could be UK Chancellor Jeremy Hunt’s worries about the US subsidies as British companies rush to avail benefits while planning to leave the UK. “Chancellor Jeremy Hunt told Sky News that Britain should be wary of any new subsidies, warning that they could undermine the economy and might even trigger a protectionist trade war,” per the news.

On the other hand, a wider-than-expected fall in US Retail Sales failed to supersede upbeat figures from the US Industrial Production and University of Michigan's (UoM) Consumer Confidence Index on the previous day and allowed the US Dollar to rebound. That said, US Retail Sales dropped by 1.0% for March versus -0.4% expected and -0.2% prior. On the contrary, Industrial Production grew by 0.4% during the stated month compared to 0.2% market forecasts and prior reading. Additionally positive was the preliminary reading of the University of Michigan's (UoM) Consumer Confidence Index for April which improved to 63.5 versus 62.0 analysts’ expectations and previous readings. Furthermore, Year-ahead inflation expectations rose from 3.6% in March to 4.6% in April while its Five-year counterpart reprinted 2.9% for the said month.

It should be noted that the Fed policymakers appeared more hawkish than their BoE counterparts in the last week and exert additional pressure on the GBP/USD prices of late.

Against this backdrop, S&P 500 Futures print mild gains after Wall Street’s downbeat closing whereas the bond yields remain sidelined after posting weekly gains.

Moving on, the current week becomes crucial for the GBP/USD traders as it offers multiple top-tier data surrounding inflation, employment and PMIs from the UK, which in turn can help justify the receding hawkish bias of the BoE officials and may keep the bears on the table. However, the US PMIs and Fed talks shouldn’t be missed for clear directions.

Technical analysis

A clear downside break of a three-week-old previous support line, now immediate resistance near 1.2420, directs GBP/USD sellers toward the 21-DMA support of around 1.2370.