GBP/USD holds near one-month highs in 1.2600s pre-US Core PCE data release

• GBP/USD has pared back from earlier highs but remains in the green and supported above 1.2600 pre-US Core PCE data.
• The pair was nonetheless able to hit monthly highs earlier in the day, with some citing UK fiscal stimulus optimism.

Though the pair has now handed back most of the gains it made during the Asia Pacific session, GBP/USD continues to trade slightly in the green and supported to the north of the 1.2600 level on Friday. FX market conditions have been fairly subdued in recent hours ahead of the release of key US Core PCE inflation data for April that, if it shows an easing of price pressures, could contribute to a continuation of recent USD weakening if it contributes to the “inflation has peaked” narrative and thus triggers a further paring back on Fed tightening bets.

Indeed, USD weakness (the DXY is on course for a second successive weekly loss, the worst losing streak since December 2021) has been the key driver behind cable’s more than 3.5% rally from earlier monthly lows in the mid-1.2100s to fresh monthly highs this Friday. But analysts have also attributed a few domestic UK factors as lending support to the rebound. Firstly, last week’s UK labour market data was strong, while the April inflation figures showed price pressures at their worst in four decades, giving a marginal boost to BoE tightening bets at the time.

Meanwhile, the UK government surprised markets on Thursday with a new, larger than expected fiscal aid package of £15 billion, aimed at helping low-income households cope with the current cost-of-living squeeze. Some analysts said that this larger than expected injection of fiscal stimulus (which will be spread over the summer and autumn) might encourage the BoE to revise higher its very pessimistic UK growth forecasts for this year and next.

A less pessimistic growth outlook means that the BoE might feel more confident that it can get away with slightly more monetary tightening in order to ensure inflation expectations don’t de-anchor. Still, FX strategists continue to warn that the UK growth outlook remains far weaker than in the US, meaning the outlook for BoE policy is far less hawkish than the outlook at the Fed. That mean, in the medium-longer term, a sustained rebound for GBP/USD doesn’t look likely. If Brexit tensions surrounding the Northern Ireland Protocol further worsen, that only could the pair’s outlook.