GBP/USD bears move in as the greenback recovers lost ground

• GBP/USD sinking as the US dollar perks up in the wake of higher yields.
• Focus turns to the Fed again, but US data this week will play a key role. 

GBP/USD is back under pressure in Tokyo as the US dollar gathers pace in its correction following the poor data that sent it off a cliff in the New York session. At the time of writing, the cable is trading at 1.1815 and down around 0.1% after falling from a high of 1.1838 to a low of 1.1813 so far in the session.

Firstly, the UK PMI readings were mixed in August, with the manufacturing reading falling to a two-year low and the service reading down slightly but above expectations. The pound remains in the hands of the Bank of England which is expected to raise interest rates by another 50 basis points at its Sept. 15 meeting. However, the focus is turning to the Federal Reserve again.

The US dollar was mixed against its major trading partners early Tuesday ahead of key data events this week, including the release of manufacturing and services PMIs for August, although turned out to be the nail in the coffin for the greenback. The S&P Global flash composite purchasing managers index (PMI) for August fell to 45 this month, the lowest since February 2021.

The data made it clear that demand for services and manufacturing continues to weaken in the face of inflation and tighter financial conditions. A reading below 50 indicates a contraction in activity. Markets are also looking ahead to the second estimate of second-quarter growth data on Thursday, personal income and spending data for July on Friday, and frequent Federal Reserve comments from the Jackson Hole conference Thursday through Saturday.  If we see more of the same from the forthcoming data this week ahead of the Jackson Hole, then the US dollar may continue to struggle in the face of a cooling demand-side economy. 

However, there was a bid forced back into the greenback and US yields following a bullish 2-year Treasury auction in the US session:

• High yield 3.307%.
• Tail 1.4 bps vs a 6-month average of -0.3 bps.
• Bid to cover 2.49X vs 6-month avg of 2.59X.
• Dealers 23% vs a 6-month average of 17.4%.
• Directs 17.3 vs a 6-month average of 22.2%.
• Indirects 59.7% vs a 6-month average of 60.4%.

The demand from domestic and international buyers is far below a 6-month average which has seen the 2 and 10-year yields rally, supporting the US dollar.

Meanwhile, the main event of the Jackson Hole conference will be Fed Chair Jerome Powell's speech on Friday. In the past, Fed chairs have used this annual speech to evaluate the current state of the economy and lay out a road map for monetary policy going forward. Analysts at TD Securities argued that with regards to the Jackson Hole that is coming up later this week,  the Fed's Chair, Jerome Powell's speech ''will likely aim to reinforce the message that multiple, sizable hikes are still in the pipeline, and easing should not be expected to be on the horizon anytime soon.''