The British pound was the weakest major currency on Wednesday, falling sharply amid a toxic mix of political turmoil, fiscal backpedalling, and dovish commentary from the Bank of England (BOE). A surprise rollback of planned welfare cuts cast doubt on the government’s fiscal credibility, while comments from BOE Governor Andrew Bailey and policymaker Alan Taylor flagged a potentially slower pace of quantitative tightening and more rate cuts ahead. With GBP/USD forming its most volatile daily range since April and key US jobs data due tonight, the pair may be poised for further downside — despite ongoing softness in the US dollar.
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Employment Figures Weaken Into Today’s Nonfarm Payrolls Figures
ADP employment figures gave President Trump all the more reason to pressure Jerome Powell into cutting interest rates on Tuesday. The -33k jobs lost in June marked the first contraction since January 2021, or second since the pandemic. While this has stirred some excitement that today’s Nonfarm payrolls release could also disappoint, it is worth remembering that ADP payrolls has a terrible track record of successfully predicting NFP on an absolute or even monthly-directional basis. Particularly in recent years.
Chart prepared by Matt Simpson - data source: Investing.com
Traders Favour September Fed Cut
Federal Reserve (Fed) Fund Futures now imply a 69% chance of a 25bp cut in September cut, and a 53% chance of a successive cut October. Yet the US dollar and bond yields were mostly higher on Wednesday and Wall Street futures continued higher on news that President Trump had secured a trade deal with Vietnam.
Chart prepared by Matt Simpson - data source: CME Fedwatch
Political Uncertainty and Fiscal Reversal Undermine GBP Confidence
The British pound was the weakest FX major on Wednesday due to a fiscal policy reversal and political Turmoil. The government's abrupt rollback of planned welfare cuts undermined anticipated fiscal savings, casting doubt on its commitment to fiscal discipline. The policy reversal intensified scrutiny of Chancellor Rachel Reeves, who appeared visibly distressed in Parliament, fuelling speculation about her potential replacement and the government's fiscal direction.
Dovish BOE Signals Add Pressure to Sterling
Investor anxiety over increased government borrowing led to a significant sell-off in UK government bonds and yields surging, but also weighing on the British pound on dovish comments from BOE members. Comments from Bank of England Governor Andrew Bailey, suggesting a potential slowdown in the bank's quantitative tightening strategy, and indications from policymaker Alan Taylor about the possibility of more rate cuts, added to the market's cautious sentiment. These signals point to a more dovish monetary policy stance amidst the unfolding fiscal challenges
GBP Weakness Broad-Based as AUD and CAD Outperform
- GBP/CAD led the way lower for the British pound with its -1.2% decline on Wednesday
- The Canadian dollar (CAD) benefitted from higher crude oil prices and the risk-on tone from Trump’s latest trade deal.
- GBP/AUD fell -0.85% with the Australian dollar rising against all FX major except the Canadian dollar on Wednesday.
- EUR/GBP rose as much as 1% by the day’s high to its most bullish level in seven weeks, though closed the day ~0.5% higher
- GBP/CHF was down -0.4% by the close at a six-week low, which underscores the bearish sentiment towards the British pound given the Swiss franc was lower against all other FX majors
- GBP/USD formed a prominent bearish outside / engulfing day to mark its most volatile day in three months, with a daily high-to-low range spanning 1.4%
GBP/USD Technical Analysis: British Pound vs US Dollar
Bulls have enjoyed a near 14% rally since the January low at 1.12 to Wednesday’s high. Yet with odds of a BOE cut rising and political turmoil resurfacing, the stage could now be set for a GBP/USD pullback.
The weekly chart shows GBP/USD has twice faltered around the 2022 high at 1.3750. A multi-week bearish divergence has formed on the weekly RSI (14), and a smaller divergence has appeared on the RSI (2) — both within the overbought zone.
This may not result in a particularly deep pullback given the ongoing weakness in the US dollar, but perhaps a move towards the 10-week EMA (1.3466) or the 2022 high (1.3434) could be on the cards.
Chart analysis by Matt Simpson - data source: TradingView GBP/USD
GBP/USD Technical Analysis: Daily Chart
Wednesday marked the most volatile session for GBP/USD since April 11. The fact that such a bearish range expansion day followed a small shooting star candle near a historical resistance level (October 2022 high) strengthens the case for bears to consider fading into rallies.
The day’s low found support just above the June VPOC (volume point of control) at 1.3350, and prices are attempting to recover. The 1-hour chart shows the RSI (2) hit a very oversold reading of 1.1 at the low, so a rebound isn't surprising. However, with the 1-hour RSI (14) trending lower and yet to reach oversold territory, these bounces may offer opportunity.
Bears could look for evidence of a swing high forming on the 1-hour chart around the 1.3700 handle, in anticipation of a break below the June VPOC — which could open the path towards the 2024 high and the 10-week EMA.
Chart analysis by Matt Simpson - data source: TradingView GBP/USD
Economic Events in Focus (AEST / GMT+10)
09:00 AUD Judo Bank Services PMI (Jun) (AUD/USD, ASX 200)
09:50 JPY Foreign Bonds Buying, Foreign Investments in Japanese Stocks (USD/JPY, Nikkei 225)
10:30 JPY au Jibun Bank Services PMI (Jun) (USD/JPY, Nikkei 225)
11:00 NZD ANZ Commodity Price Index (MoM) (NZD/USD, NZX 50)
11:30 AUD Trade Balance (May), Exports (MoM), Imports (MoM) (AUD/USD, ASX 200)
11:45 CNY Caixin Services PMI (Jun) (USD/CNH, China A50)
13:35 JPY 30-Year JGB Auction (USD/JPY, Nikkei 225)
16:30 CHF CPI (MoM), CPI (YoY) (Jun) (USD/CHF, SMI)
17:05 EUR German Buba Balz Speaks (EUR/USD, DAX)
17:55 EUR Germany Composite & Services PMI (Jun) (EUR/USD, DAX)
18:00 EUR Eurozone Composite & Services PMI (Jun) (EUR/USD, Euro Stoxx 50)
18:30 GBP BoE Credit Conditions Survey, Composite & Services PMI (Jun) (GBP/USD, FTSE 100)
21:30 EUR ECB Publishes Account of Monetary Policy Meeting (EUR/USD, DAX)
22:30 USD Nonfarm Payrolls (Jun), Unemployment Rate (Jun), Average Hourly Earnings (MoM, YoY), Participation Rate (Jun), Private & Government Payrolls (Jun), Initial & Continuing Jobless Claims, Trade Balance (May) (USD, S&P 500, Nasdaq 100, Dow Jones, Gold, Crude Oil)
22:30 CAD Trade Balance (May), Imports & Exports (May) (USD/CAD, TSX)
23:45 USD S&P Global Composite & Services PMI (Jun) (USD, S&P 500, Nasdaq 100, Dow Jones)
00:00 All Day United States – Independence Day (Public Holiday) (USD, S&P 500, Nasdaq 100, Dow Jones, Gold, Crude Oil)
00:00 USD Factory Orders (MoM) (May), ISM Non-Manufacturing PMI (Jun) (USD, S&P 500, Nasdaq 100, Dow Jones)
01:00 USD FOMC Member Bostic Speaks (USD, S&P 500, Nasdaq 100)
03:00 USD Atlanta Fed GDPNow (Q2), U.S. Baker Hughes Oil Rig Count (USD, S&P 500, Crude Oil)
View the full economic calendar
-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
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