GBP/USD edges higher despite risk aversion

Weaker than expected economic data in China threatens to derail economic growth and trigger risk aversion. The US central bank seems pressured by Solid US economic data released since last Friday ahead of the awaited US inflation data.

The GBP/USD pair is upward biased, and could even test Tuesday’s high of 1.2269 ahead of 1.2300. The British Pound turned positive despite overall risk aversion triggered by China’s weakened exports.

The latest headlines involving Russian President Vladimir Putin, saying that “the threat of nuclear war is increasing,” boosted the US dollar, giving another leg-down to the GBP/USD pair. The Sterling has recovered, and the GBP/USD is trading at 1.2215, above its opening price, after reaching a high of 1.2226.

Sentiment remains deteriorated after China’s Trade Balance data weakened, showing that Exports plunged 8.7% YoY, below estimates of 0.3% contraction. Economic data since the second half of the last week from the United States showed that the labour market remains tight and that wages are rising, a signal that is not going to be liked by Fed Chair Jerome Powell.

Given that Powell’s speech last Wednesday gave the green light to lower interest rate hikes, further inflation data to be revealed this Thursday with the Producer Price Index (PPI) and next week’s Consumer Price Index will be crucial to assess the following week’s rate hike by the Fed.

The lack of economic data from the UK keeps the Sterling susceptible to moves according to US Dollar dynamics. The political developments during Lizz Truss’ days decreased now due to a fiscally responsible budget, by the new Prime Minister Rishi Sunak.

The UK economy is already in recession according to several economists, and a gloomy outlook with labour shortages, wage inflation, post-Brexit problems and weak investment hurt the prospects for higher GBP/USD prices.

Next week, the Fed and the BoE are expected to raise rates by 50 bps, leaving interest rates differentials unchanged. Investors also await the Summary of Economic Projections (SEP) released by the Fed, which will update Fed officials’ projections for the Federal Fund rates (FFR). A higher peak for the FFR would be hawkish and could spur US Dollar strength towards the end of 2022.