GBP/USD dribbles above 1.1400 with eyes on yearly low, Fed vs. BOE divergence

• GBP/USD bounces off intraday low amid a sluggish welcome to the British traders after long weekend.
• British politics, Brexit headlines join cautious mood ahead of key central bank announcements to weigh on sentiment.
• BOE is likely to announce 0.50% rate hike but the Fed’s 75 bps move is already priced-in and keeps sellers on the edge.
• Risk catalysts, second-tier US data will also direct intraday moves.

GBP/USD struggles to defend buyers, despite the latest bounce off intraday low to 1.1420, as British traders return to their table after a long-weekend on Tuesday. The Cable pair’s latest inaction could also be linked to the market’s fears ahead of the key monetary policy announcements from the Federal Open Market Committee (FOMC) and the Bank of England (BOE). Also challenging the quote are the headlines surrounding Brexit and the UK politics.

A slew of global politicians are in the London to pay their respects to the Queen Elizabeth II, as well as discuss future ties amid a change in monarch and the Prime Minister. Majority of have, including Irish PM Micheal Martin, are less likely to witness any major change in their key strategic push, Brexit in this case, which in turn keeps the GBP/USD bears hopeful.

Elsewhere, softer US housing data and downbeat inflation expectations seemed to have favored the GBP/USD to rebound from the lowest levels since 1985 the previous day. The US NAHB Housing Market Index fell for a ninth consecutive month to 46 versus 48 expected and 49 prior. That said, the US inflation expectations, as per the 10-year breakeven inflation rate per the St. Louis Federal Reserve (FRED) data, dropped for the third consecutive day to a two-month low near 2.34% by the end of Monday’s North American trading session. More importantly, the 5-year breakeven inflation rate per the FRED data dropped to the lowest levels since September 2021, at 2.44% at the latest. The same raised concerns about the market’s surprise reaction to the hawkish Fed bets.

Even so, the CME’s FedWatch tool hints at 82% chance of the 75 basis points of a Fed rate hike during Wednesday’s monetary policy meeting. Also, the tool signals around 18% odds favoring the full one percent upside in the rate by the Fed.

Amid these plays, the S&P 500 Futures fade the previous day’s bounce off a two-month low around 3,920 whereas the US 10-year and 2-year Treasury yields remain sidelined at the highest levels since April 2011 and October 2007 in that order. Also, Japan’s 10-year Government Bond yields (JGBs) jump to the highest since 2016.

Technical analysis

A two-month-old support line, near 1.1330 by the press time, restricts short-term GBP/USD downside.