GBP/USD Braces for Powell, UK CPI Amid Geopolitical Uncertainty

The GBP/USD pair bounced off its lows on data showing strong wage growth, which may potentially delay the first Bank of England rate cut. Other GBP crosses did even better as the odds of a June rate cut fell. However, despite its slight recovery, the GBP/USD stayed below the broken 1.25 handle, with traders continuing to largely favor the US dollar in what has been a risk-off environment amid the escalation of the of the geopolitical risks in the Middle East.

The GBP/USD will remain in sharp focus as we head to the middle part of the week, owing to the release of more important macro data from the UK: CPI, which could set the near-term direction for the pound. We also have a few US data releases this week (see below) and a speech by Powell today, but the key data is the Core PCE index next week, which means there is plenty of time for the dollar to find fresh support.

The greenback was already supported by strong activity data and sticky inflation figures we saw last week, plus other external factors such as elevated geopolitical risks and a dovish-leaning ECB, which hurt the euro. Thus, compared to other GBP crosses, the GBP/USD only managed to find mild support from this morning’s wages data from the UK.

The ONS reported that wages grew by 6% in the three months to March compared to a year earlier, only slightly down from the 6.1% reading in the previous month, while including bonuses, average earnings remained unchanged at 5.6%. Additionally, jobless claims rose by less than expected (10.9K vs. 17.2K eyed). However, the unemployment rate unexpectedly jumped to 4.2% from 3.9% last, suggesting the jobs market is cooling.

The US dollar will also remain in focus with attention turning to a speech by Federal Reserve chairman Jerome Powell, who is scheduled to speak later today and may provide clues about the path for interest rates in the US. The Dollar Index has risen to a 5-month high.

We had more forecast-beating US data supporting the greenback on Monday, as retail sales rose by more than expected to 0.7% month-on-month. The sales data underscores the surprising resilience of the US consumer and undermines the Fed’s ability to cut rates. The retail sales data came after US CPI rose last week for a third straight month.

But right now, it is mostly haven flows amid ongoing Middle Eastern concerns that is driving the markets, and keeping the dollar higher. With the Fed likely to keep interest rates high for longer and Middle East tensions unlikely to ease materially, this is likely to keep risk appetite low, and the dollar supported. Thus, the GBP/USD could remain under pressure for a while yet, especially if the UK’s CPI turns out to be weaker than expected on Wednesday.

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As the likes of the ECB and BoE get closer to cutting interest rates, possibly in June, the Fed’s timeline has lengthened, which has been the main reason behind the GBP/USD decline. This narrative may get even more relevant should the upcoming data from the UK disappoint expectations, or if US data shows further resilience.

This week, though, the primary concern for the GBP/USD and broader markets arises from geopolitical tensions involving Iran, Israel, and their allies. On a macro level, GBP/USD traders will also need to keep a close eye on the economic data calendar and factor in market-moving UK releases, including CPI on Wednesday and retail sales on Friday. From the US, attention will be on Powell and industrial production on Tuesday, followed by the Philly Fed Index and Existing Home Sales on Thursday.

Here are the key data highlights to watch in the week ahead:

A key highlight among the data releases is the UK CPI, scheduled for publication on Wednesday, at 07:00 BST. There has been considerable speculation regarding potential rate cuts by the Bank of England, prompting the central bank to push back against what it perceives as excessively dovish market expectations.

Despite core CPI registering a 0.6% increase last month, more than double the BOE's 2% target, annual inflation rates for both CPI and core CPI are showing signs of moderation, which is encouraging. Nonetheless, it may still be premature to anticipate easing measures from the BOE in June. The upcoming CPI data would need to indicate a further weakening trend to sustain such expectations.

While a few US macroeconomic indicators are on the agenda for the upcoming week, the next major US data release is not expected until later in the month, with the Fed's preferred inflation gauge set to be published on April 26^th – i.e., Core PCE index. Until then, the dollar may find support on any short-term declines, especially considering that both US interest rates and those of other major economies, such as the ECB and the Bank of Canada, have recently taken a more favourable turn for the greenback.