GBP/USD holds in mid-1.2500s despite PM Johnson’s looming confidence vote, eyes US CPI later this week

• GBP/Usd rebounded from a key area of support in the upper 1.2400s to the mid 1.2500s on Monday.
• Sterling is outperforming despite UK PM Johnson’s looming no-confidence vote that could unseat his premiership.
• The week will otherwise be quiet until Friday’s US CPI data release.

Despite UK PM Boris Johnson’s looming confidence vote later on Monday evening UK time, it's all cheer for sterling at the start of the new week, with the currency outperforming its G10 peers as UK markets reopen following a long week of celebrations for the Queen’s Platinum Jubilee. Yield differentials appear to be one factor behind sterling’s outperformance, with UK 2-year yields last up nearly 7 bps on the day as UK bond markets reopen for the first time since last Wednesday.

GBP/USD was last trading with gains of about 0.5% on the day close to the 1.2550 level, having rebounded from a strong area of support in the 1.2460-80 region (last week’s lows and the 21-Day Moving Average). Analysts are framing a potential defeat for Johnson later in the day as a potential positive, or at least not a negative, for sterling, given the PM’s waning authority in recent months amid the ongoing “partygate” scandal where the PM and his staff incurred a number of policy fines over breaching lockdown rules.  

Aside from UK political machinations, things are set to be quiet for GBP/USD traders until Friday, when US Consumer Price Inflation data for May is set for release. Until then, there is a chance FX markets remain locked within recent ranges, suggesting GBP/USD remaining between the mid-1.2400s to upper 1.2600s. However, should Friday’s US inflation data then point to a further easing of price pressures, some analysts expect USD weakness to come back to the fore.

Easing US price pressures would come as a welcome development for the Fed, not only reducing the chance of what would be a fourth consecutive 50 bps rate hike in September (50 bps hikes in June and July are seen as a done deal) but also reducing the pressure on the Fed to keep aggressively lifting rates in Q4 2022 and 2023. A less hawkish Fed outlook would undermine the US dollar as well as boost risk appetite, a bullish combination for GBP/USD. If the bullish scenario unfolds, traders will be looking to resistance in the 1.2700 area, including from the 50DMA.