GBP/USD reclaims 1.2200 despite risk aversion as the US Dollar tumbles

• Weaker-than-expected economic data in China threatens to derail economic growth and trigger risk aversion.
• Federal Reserve pressured by Solid US economic data released since last Friday and US inflation data looming.
• GBP/USD: Remains upward biased, could test Tuesday’s high of 1.2269 ahead of 1.2300.

The British Pound (GBP) turned positive despite overall risk aversion triggered by China’s exports weakening. Additionally, the latest headlines involving Russian President Vladimir Putin, saying that “the threat of nuclear war is increasing,” bolstered the US Dollar (USD), giving another leg-down to the GBP/USD pair. Nevertheless, the Sterling has recovered, and the GBP/USD is trading at 1.2215, above its opening price, after reaching a high of 1.2226.

Exports in China plunged, sparking global recession fears

Sentiment remains deteriorated after China’s Trade Balance data weakened, showing that Exports plunged 8.7% YoY, below estimates of 0.3% contraction. Economic data since the second half of the last week from the United States (US) showed that the labor market remains tight and that wages are rising, a signal that is not going to be liked by Federal Reserve (Fed) Chair Jerome Powell. Given that Powell’s speech last Wednesday gave the green light to lower interest rate hikes, further inflation data to be revealed this Thursday with the Producer Price Index (PPI) and next week’s Consumer Price Index (CPI) would be crucial to assess the following week’s rate hike by the Federal Reserve.

The lack of economic data on the United Kingdom (UK) front keeps the Pound Sterling adrift to US Dollar dynamics. However, it appears that the political drama spurred during the premiership of Lizz Truss has abated so far, due to a fiscally responsible budget, by the new Prime Minister Rishi Sunak. Nevertheless, it should be said that the UK economy is “likely” already in recession, and a gloomy outlook with labor shortages, wage inflation, Brexit jitters, and weak investment, could hurt the prospects for higher GBP/USD spot prices.

In the next week, the Federal Reserve and the Bank of England are expected to raise rates by 50 bps, leaving interest rates differentials unchanged. What could rock the boat is the Summary of Economic Projections (SEP) released by the Fed, which will update Fed officials’ projections for the Federal Fund rates (FFR). A higher peak for the FFR would be hawkish and could spur US Dollar strength towards the end of 2022.

GBP/USD Price Analysis: Technical outlook

The GBP/USD daily chart suggests the pair remains upward-biased after bouncing off the 200-day Exponential Moving Average (EMA) at 1.2104. Geopolitical headlines linked to Putin and nuclear war issues spurred a flight to safety, but nerviosism faded as the GBP/USD approaches Tuesday’s high of 1.2269. Therefore, the GBP/USD next resistance level would be 1.2269, followed by the psychological 1.2300. As an alternate scenario, the GBP/USD first support would be 1.2200, followed by the 200-day EMA at 1.2104 and the 20-day EMA at 1.2048.