GBP/USD eyes break below 1.3100 and towards key support amid buoyant buck

• GBP/USD is trading with a downside bias as the euro underperforms and 21DMA continues to act as a ceiling.
• A break lower to test last week’s 1.3050 lows looks on the cards, with bears also eyeing 1.3000 annual lows.
• Following hawkish Fed commentary over the weekend and ahead of possibly more this week, USD risks are tilted higher.

In a relatively tame start to the week for currency markets, GBP/USD is trading with a downside bias and is currently threatening a downside break of the 1.3100 level. Sterling is likely weighed by underperformance in its cross-English Channel peer the euro, which is underperforming ahead of the resumption of Russo-Ukraine peace talks later in the session and amid further chatter about a possible EU embargo on Russian energy imports. Commentary from BoE policymakers on Monday did not stray into the territory of monetary policy and thus hasn’t impacted cable, which probed last Friday’s lows in the 1.3080s earlier in the session and is eyeing a break lower towards last week’s lows around 1.3050.

“Despite much focus on the heaviest cost of living rise since British records began (1950s), the market still prices the BoE Bank Rate at 2.20% at the December meeting later this year,” noted analysts at ING. “That pricing of the BoE cycle is likely keeping GBP relatively well bid, although we do think the risks are growing of Cable breaking down to the $1.25/28 area over coming months,” they warn. Amid a light UK data schedule this week, the risks posed to GBP from fears of a weakening UK economy likely won’t be the major market focus.

Rather, the outlook for Fed policy is likely to be a much more important topic. Already over the weekend, there has been fresh hawkish commentary. Fed’s John Williams warned that balance sheet reduction could start as soon as May and Fed’s Mary Daly said the case for a 50 bps rate hike in May has grown. Various Fed policymakers will be making public appearances and talking policy throughout the week and the minutes of the Fed’s most recent, hawkish meeting will be published on Wednesday.

Risks seem tilted towards the upside for the US dollar amid the risk of further hawkish Fed vibes. GBP/USD’s 21-Day Moving Average in the 1.3120s, which has been providing solid resistance over the past few weeks, looks likely to continue acting as a ceiling for the time being.