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GBP/USD drops to 1-mth lows amid risk-aversion

Sentiment deteriorated sharply Monday, sending the GBP/USD pair to one-month lows.

The Pound cratered more than 1% on Monday as the risk-off trading approach dominated in the markets again, sending the GBP/USD pair to significant support.

UK economy contracts again

According to the latest numbers from the Office for National Statistics, following a 0.1% fall in March, the GDP shrunk by 0.3% in April, compared to consensus predictions of 0.1% growth. Contractions in services, industry, and construction have been observed for the first time since January 2021.

The government’s Covid Test and Trace and jab programs were scaled down, according to the ONS, which contributed to the GDP loss.

ONS director of economic statistics, Darren Morgan, said: “A big drop in the health sector due to the winding down of the test and trace scheme pushed the UK economy into negative territory in April.

The 0.3% decline isn’t as alarming as it appears, but it does raise the likelihood that the Bank of England will choose a 25-basis-point rate hike this Thursday rather than the 50-basis-point increase market players expect.

โ€œWith markets currently pricing in seven 25 bps rate hikes by year-end, we think the risk of a dovish repricing in the GBP curve after this weekโ€™s meeting is high, and we expect more weakness in the pound after the announcement.โ€ analysts at ING think.

Other UK data indicated that Manufacturing and Industrial Production dropped by 1% and 0.6%, respectively, in April.

In other news, as per the Financial Times, UK Tory MPs have accused Prime Minister Boris Johnson of ‘destroying the UK and everything the Conservatives stand for’ as he prepares to submit legislation on Monday to repeal the Northern Ireland Protocol.

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US inflation, Fed in focus

In the US, Concerns about inflation and expectations of more aggressive tightening by the Federal Reserve sent the markets sharply lower last week. The latest Consumer Price Index (CPI) report showed annual inflation rising to a 40-year high of 8.6% in May, the highest reading since December 1981.

On Wednesday, the US central bank is expected to raise the federal funds rate by 50 basis points (bps) to a range of 125 to 150 bps. The following statement should be as hawkish as possible, while some market players project the Fed could surprise by a 75 basis points rate hike.

Technically speaking, the pair is now testing Mayโ€™s lows in the 1.2160 region. However, judging from the selling pressure, that support will likely be broken down soon. In that scenario, the target could be at the psychological level of 1.20. Sentiment in the markets remains pessimistic, boosting the USD. If that changes, we could see some profit-taking, possibly helping lift the GBP/USD pair toward the first resistance at 1.2420.

GBP/USD daily chart, Source: Authorยดs analysis, tradingview.com

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