GBP/USD BULLS STEP IN AT MULTI YEAR LOWS

• GBP/USD bulls move in at multi-year lows as month-end consolidation takes place. 
• Sterling has come under pressure as BoE expectations have eased and US dollar rallies to 20-year highs. 

GBP/USD is up to some 0.22% at the time of writing as the US dollar starts to lose traction across the G10s into month-end sessions. Investors have piled into the greenback this week and the price is expensive ahead of the key events coming up.

The US dollar hit its highest level since 2002 while Wall Street rose and European shares moved off six-week lows as strong earnings reports offset some of the gloomy US economic data. Additionally, US government bonds rose ahead of the Federal Reserve next week despite the tightening expectations that have been robust leading into the meeting.

Markets are looking for at least a 50 bp hike at the May 3-4 meeting and again at the June 14-15 meeting. This is fully priced in, with nearly 25% odds of a possible 75 bp move in June. the surprise will come if there is anything short or above this consensus at next week’s meeting.

”Looking ahead, swaps market is pricing in 275 bp of tightening over the next 12 months that would see the policy rate peak near 3.25%. While this almost meets our own call for a 3.5% terminal rate, we continue to see risks that the expected terminal rate moves even higher if inflation proves to be even more stubborn than expected,” analysts at Brown Brothers Harriman said.

As for data, the advance estimate of Q1 Gross Domestic Product dropped 1.4% saar, versus consensus expectations for a 1.0% lift. However, the details remain robust, with personal consumption up 2.7% saar, disposable income rising 4.8% and gross private investment up 2.3%.

”So underlying private demand growth remains firm,” analysts at ANZ Bank argued. However, other components of GDP swamped those gains. Excessive domestic demand drove a 17% saar lift in imports, while exports contracted 5.9%. That meant net trade subtracted 3.2% from GDP.”

As for domestics, BOE tightening expectations have eased a bit. ”WIRP suggests another 25 bp hike to 1.0% is fully priced in for the next meeting May 5, while swaps market is pricing in 175 bp of tightening over the next 12 months vs. 200 bp at the start of this week that would see the policy rate peak near 2.5%,” the analysts at BBH said.