GBP/USD trading subdued under key fib level around 1.3550 as FX markets await key risk events

• GBP/USD continues to trade in subdued fashion in fitting with the broader FX market feel in the 1.3550 area.
• A key fib retracement in the 1.3550s is capping the price action whilst 1.3500 is acting as support.
• FX markets are in wait-and-see mode ahead of this week’s US CPI report.

In fitting with the broadly subdued start to the week in global FX markets as traders await key US Consumer Price Inflation data that could influence Fed tightening expectations on Thursday, GBP/USD has remained contained in the 1.3550 area. Indeed, as was the case on Monday, the presence of the 50% Fibonacci retracement back from the 2022 high at 1.3750 to the 2022 low at 1.3350 in the 1.3550s is again capping the price action. Meanwhile, dips back towards 1.3500 continue to attract buying interest.

Last week’s hawkish BoE surprise, where four out of nine rate-setters voted for a larger 50bps hike (while the majority voted for a 25bps hike) has not given sterling lasting support. GBP/USD was unable to hold above 1.3600 in wake of the BoE’s meeting before then being knocked back into the low 1.3500s by a strong US labour market report that pumped Fed tightening bets.

Focus on the impending cost of living crisis in the UK is likely the main factor keeping sterling capped. Taxes and energy prices are set to rise in Q2 all while inflation continues to eat away at incomes, undermining expectations for how high the BoE’s terminal rate will eventually be. Bank of America said on Tuesday that its measure of UK household confidence in their personal finances fell to its lowest since the bank began its survey in 2017.

The failure to rally post-last week’s hawkish BoE surprise suggests downside risks for GBP/USD going forward, if the US dollar can recover from recent positioning-related weakness. A break below support at 1.3500 could open the door to a drop back towards 1.3400 and the next area of key support in the mid-1.3300s in the form of last month’s lows.