GBP/USD consolidates around 1.3000, eyes bearish breakout with Fed/BoE policy divergence in focus

• GBP/USD has spent Tuesday flirting with the 1.3000 level and remained just above last week’s annual lows.
• With the BoE increasingly at risk of disappointing hawkish market tightening expectations, a break below 1.3000 soon remains a risk.

GBP/USD flirted with the 1.3000 level on Tuesday, with the bears eyeing but not quite getting a test of last week’s multi-month lows in the 1.2970 area. Despite the return of European flows after market closures for Easter Monday, price action in G10 FX markets has for the most part been quite subdued on Monday, with the notable exception of significant yen weakness as a result of a sharp rise in US and European bond yields.

Traders are looking ahead to remarks from Fed and BoE heads Jerome Powell and Andrew Bailey at this week’s IMF/World Bank meetings on Thursday. The former is expected to solidify expectations for 50 bps rate hikes at the next few Fed meetings as the Fed looks to get US inflation under wraps. Bailey, meanwhile, may strike a more cautious tone on the prospect for further rate hikes, reflecting the recent hawkish shift in BoE language at its last policy announcement.

The IMF released its quarterly World Economic Outlook report on Tuesday and downgraded global growth forecasts for this and next year, as expected. Notably, the UK was forecasted to have the weakest growth prospects over the next two years, chiming with the BoE’s increasing concern about the UK outlook with the country currently in the throes of a historic squeeze on living standards.

Many FX strategists have labelled money market-priced expectations for a further nearly 150 bps in tightening this year from the BoE as overly excessive. Should markets start paring back on this pricing amid dovish BoE speak in the coming weeks, GBP/USD remains at risk of tumbling under 1.3000.

Technicians have noted that the pair has formed a descending triangle (with the 1.3000 level the key support) over the last month or so, another ominous sign that a bearish break is in the offing.