GBP/USD: Navigating the Uncertainty of US CPI and FOMC Releases

UK Growth Flatlines, Sterling Hesitant and FTSE Lifts:

• UK GDP stalls in April, adding to the misery of yesterdays jobs rout

• Sterling reveals a slight reprieve from recent bearish pressure as all eyes turn to US CPI, FOMC

• The FTSE provided a strong start to the day on news of Rentokils new investors

UK GDP Stalls in April, Adding to the Misery of Yesterdays Jobs Rout

The UK economy failed to grow in the entire month of April as manufacturing, industrial production and especially construction registered contractions. April‘s data compared to April of 2023 witnessed a 0.6% increase, marginally lower than last month’s 0.7% increase.

The data comes hot off the heels of yesterdays UK jobs report which registered an alarming 50k claimants seeking unemployment benefits and an unemployment rate of 4.4%, up from 4.3%.

The data does very little to support Rishi Sunak in his Tory Partys desperate attempts to win back the voter base after polls show overwhelming support for the Labour Party. The cost of living crisis, anaemic growth, and a string of missteps from party officials have contributed to the shift away from the governing party with the elections scheduled for the 4th of July this year.

Sterling Reveals a Slight Reprieve from Recent Bearish Pressure as All Eyes Turn to US CPI, FOMC

Cable (GBP/USD) has managed to halt the recent decline spurred on by Fridays hot NFP print in the US. The move may be due to a squaring off of positions ahead of what is a very uncertain and potentially volatile trading session. High impact data out of the US today (US CPI and the FOMC statement and forecasts) has the full attention of the market.

Stubborn inflation is likely to add to the loss of confidence amongst the committee when it comes to inflation returning to the 2% target. Hot monthly CPI for most of 2024 has forced the Fed to manage their expectations around the number and timing of Fed funds rate cuts this year. If this continues to be the case, GBP/USD may be vulnerable to a move lower but such a move could be limited by the fact the FOMC dot plot is due to be released a few hours later.

GBP/USD found support at 1.2736, remaining within the ascending channel. Upside levels of interest appear at 1.2800 and 1.2895. Conversely, an encouraging CPI print (lower CPI than expected) can add to the reprieve seen in the pair recently.

However, the main event of the day is likely to be the updated dot plot representation of the Fed's rate outlook for the remainder of 2024. In March, the Fed anticipated they would cut the Fed funds rate three times but sticky inflation and a resurgent labour market are likely to see this estimate trimmed. The question is whether the Fed removes just one, or two rate cuts from the March projections. In the event the Fed remove two rate cuts, the dollar is likely to appreciate as rates are likely to buoy the greenback at a time when other central banks are about to or have already started cutting rates.

Typically, sterling strengthens when gilt yields rise – especially the rate sensitive 2-year gilt. Yields have edged lower on the worsening jobs and growth data but thus far this has not weighed on the pound.

The FTSE 100 Index started the day on a strong footing, lifted by news of a major investment in Rentokil by activist investor Nelson Peltz's Trian Fund Management. The blue 50-day simple moving average has provided some form of dynamic support as the index looks to halt the recent bearish move.