GBP/USD rebound pokes 1.0800 as BOE hesitates, DXY tracks yields ahead of key data

• GBP/USD picks up bids to refresh intraday high, extends bounce off all-time low.
• US dollar pares recent gains amid sluggish session, softer data, inflation expectations add strength to the DXY pullback.
• BOE resists taming GBP strength, UK policymakers refrain from reversing any measures announced recently.
• US data, Fedspeak will be crucial for directions, bears are likely to keep reins amid pessimism surrounding UK.

GBP/USD reverses the previous day’s heavy losses as it bounces off the all-time low to 1.0780 during early Tuesday morning in Europe. In doing so, the Cable pair renews intraday high while also snapping the five-day downtrend.

The quote’s latest gains could be linked to the hopes from the UK Chancellor (Finance Minister) Kwasi Kwarteng that he will be able to restore investor confidence via his medium-term budget, after sending sent sterling and government bonds into freefall the previous day. Also, expectations that the Bank of England (BOE) won’t need to intervene to defend the British Pound (GBP) add strength to the GBP/USD rebound. “The threshold for the Bank of England intervening in the foreign-exchange market to stabilize the pound is high,” said the HSBC Bank.

British finance minister Kwasi Kwarteng will set out a "Medium-Term Fiscal Plan" on Nov. 23, alongside growth and borrowing forecasts from the Office for Budget Responsibility, Britain's finance ministry said on Monday. The news also quotes the British Finance Ministry as saying, "The Fiscal Plan will set out further details on the government's fiscal rules, including ensuring that debt falls as a share of GDP in the medium-term."

On the other hand, the US Dollar Index (DXY) retreats from the 20-year high, down 0.40% intraday near 113.68 by the press time, as softer yields join downbeat US data and inflation expectations.

That said, US Treasury yields retreat from the multi-year high while the S&P 500 Futures also print mild gains by the press time. That said, US 10-year Treasury yields rose to the highest levels in 12 years while the 2-year bond coupons refreshed the 15-year top as traders rushed to the risk safety. Further, Chicago Fed National Activity Index weakened to 0.0 in August versus 0.09 market expectations and an upwardly revised prior reading of 0.29. Further, the US inflation expectations as per the 10-year and 5-year breakeven inflation rates per the St. Louis Federal Reserve (FRED) data, signaled that the gauges refreshed the multi-day low on Monday. While noting the details, the longer-term inflation expectations dropped to the lowest level since July 13, 2022, whereas the 5-year benchmark slumped to the lowest levels since June 2021 with the latest figures being 2.32% and 2.33% respectively.

It should be noted that the scathing response to the UK Chancellor Kwarteng’s mini-budget triggered fears of more pain for the British economy and dragged the cable to an all-time low, backed by the hawkish Fedspeak. Adding to the downside fears was the BOE’s inaction afterward.

To sum up, GBP/USD is likely to extend the latest corrective bounce but the upside potential is limited ahead of the US CB Consumer Confidence for September and Durable Goods Orders for August. Also important to watch are headlines from Britain.

Also read: US Consumer Confidence Preview: Near-term relief or more risk aversion?

Technical analysis

GBP/USD rebound needs validation from the 1.1000 psychological mark to aim for the previous support line from May, around 1.1270-80 by the press time. Otherwise, a pullback towards the year 1985 bottom close to 1.0520 and then to the recent low near 1.0340 can’t be ruled out.