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GBP/USD witnessed a dramatic intraday turnaround from sub-1.2000 levels on Tuesday.
The upbeat UK PMI prints boost the Sterling and prompt an aggressive short-covering move.
Hawkish Fed expectations, a softer risk tone underpins the USD and caps any further gains.
The GBP/USD pair reverses an early European session dip to levels just below the 1.2000 psychological mark and rallies over 125 pips from the daily low. Spot prices turn positive for the third straight day and climb beyond the 1.2100 round figure, hitting a four-day high in the last hour.
The British Pound strengthens across the board in reaction to the better-than-expected UK PMI prints and prompts aggressive short-covering around the GBP/USD pair. In fact, S&P Global’s flash UK Manufacturing PMI unexpectedly improved to 49.2 in February from 47.0 in the previous month. Adding to this, the gauge for the UK services sector returns to expansion territory and jumps to 53.3 during the reported month, squashing the recession narrative and boosting the Sterling.
That said, expectations that the Bank of England’s (BoE) current rate-hiking cycle is nearing the end, along with sustained US Dollar buying, act as a headwind for the GBP/USD pair. Firming expectations that the Fed will stick to its hawkish stance trigger a fresh leg up in the US Treasury bond yields and underpin the buck. Apart from this, a generally weaker tone around the equity markets further benefits the Greenback’s relative safe-haven status against its British counterpart.
Hence, it will be prudent to wait for strong follow-through buying before placing fresh bullish bets around the GBP/USD pair and positioning for an extension of the recent bounce from the 1.1915 area, or the lowest level since January 6 touched last Friday. Market participants now look forward to the flash US PMI prints and Existing Home Sales. This, along with the US bond yields and the broader risk sentiment, will drive the USD demand and provide some impetus to the major.
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