GBP/USD trades tad lower in holiday-thinned trade as bears eye last week’s sub-1.30 lows

• GBP/USD is trading a tad weaker amid holiday-thinned trade and is eyeing a test of last week’s sub-1.3000 lows.
• Rhetoric from BoE’s Bailey and Fed’s Powell is likely to highlight a growing BoE/Fed policy divergence.
• Analysts continue to call for GBP/USD falling into the upper 1.20s.

Despite the absence of UK and mainland European market participants given public holidays due to ongoing Easter holiday celebrations in the region, GBP/USD has been trading with a downside bias on Monday amid ongoing USD strength. The pair currently trades just over 0.1% lower in the 1.3030s. Traders are citing continued upside in US yields in premarket trade as markets continue to price in a more aggressive Fed response to tackle rampant US inflation as supporting the buck on Monday.

FX market flows should pick continue to pick up in the coming hours as US market participants enter the fray. Intra-day traders will be eyeing whether USD profit-taking allows GBP/USD to retest its 21-Day Moving Average in the 1.3100 area, or whether the pair extends on modest morning losses to test recent lows.

UK political headlines pertaining to UK PM Boris Johnson’s “partygate” scandal are heating up given his recent fines from the police for breaking lockdown rules and pressure is mounting on the PM to resign. Given the worsening cost-of-living crisis in the UK, Chancellor of the Exchequer Rishi Sunak, the man who used to be the favourite to replace Johnson as PM, has seen his approval rating tank in recent weeks.

If Johnson does resign, there is thus less clarity about a potential successor PM. As a result, there could be some short-lived GBP volatility, and it is a theme worth monitoring. Otherwise, the broader themes of the Russo-Ukraine war and central bank tightening will drive the price action in GBP/USD this week.

BoE Governor Andrew Bailey and Fed Chair Jerome Powell will both be orating later in the week. Their rhetoric is likely to highlight a growing divergence between the two banks, with the BoE likely to slow the pace of rate hikes on the coming quarters amid concerns about economic weakness, while the Fed is likely to accelerate them. Strategists continue to call for GBP/USD to fall into the upper 1.20s.