GBP/USD rides wave of US dollar weakness, now in the upper 1.2500s as key events loom

• GBP/USD has extended on recent gains on Monday and is trading in the upper 1.2500s.
• BoE’s Bailey will be speaking soon after UK labour and inflation data last week boosted the case for more tightening.
• Cable is eyeing a test of monthly highs as UK & US PMIs, Fed meeting minutes, US GDP and US Core PCE data looms.

GBP/USD is on Monday benefitting from a wave of US dollar weakness and was last trading in the upper 1.2500s, its highest levels in more than two weeks and not far below monthly highs in the mid-1.2600s. Cable’s 0.7% gain on Monday has taken the pair’s rebound since mid-month lows in the mid-1.2100s to an impressive 3.5%.

Whilst the latest leg of strength is being attributed to US dollar weakness, with some citing optimism about China lockdown easings as spurring weakness in the safe-haven buck, sterling was supported last week after UK labour market and consumer price inflation supported the case for further tightening from the BoE, even as evidence continues to build that the UK economy is suffering amid its worst cost-of-living squeeze in decades.

BoE Governor Andrew Bailey will probably elaborate on some of these themes in a speech at 1615:GMT on Monday, which will be the main event of the day for GBP/USD traders. Focus then turns to UK and US flash PMI business survey data for May which will be released on Tuesday, ahead of a speech from Fed Chair Jerome Powell. Fed minutes, the second estimate of US Q1 GDP growth and US April Core PCE inflation data will then be released later in the week.

As a result, the themes of Fed tightening and high inflation will remain in focus, and some analysts doubt how legs the recent pullback in the US dollar has to run. GBP/USD is above its 21-Day Moving Average (in the mid-1.2400s) and if it can break above monthly highs, has a shot at testing its 50DMA just above 1.2800. But any further rally may be too much to ask given the comparative strength of the US economy versus the UK and the Fed’s more hawkish stance.