GBP/USD remains on the defensive near three-week low, just above mid-1.3000s

The GBP/USD pair remained on the defensive through the early European session and was last seen trading just a few pips above the three-week low, around the 1.3055 region.

The pair witnessed some selling during the first half of the trading on Wednesday and dropped to the lowest level since March 16, though showed resilience below the mid-1.3000s. The US dollar gained traction for the fifth successive day and shot to a nearly two-year peak, which, in turn, exerted some downward pressure on the GBP/USD pair.

The markets seem convinced that the Fed would hike interest rates by 100 bps over the next two meetings to combat stubbornly high inflation. Moreover, Fed Governor Lael Brainard said on Tuesday that the US central bank could start reducing its balance sheet at a rapid pace as soon as the May meeting and provided a goodish lift to the buck.

Expectations for a more aggressive Fed pushed the yield on the 2-year US government bond, which is highly sensitive to rate hike expectations, to its highest level since January 2019. Moreover, the yields on the 5-year and the benchmark 10-year bonds jumped to their highest since December 2018 and April 2019, respectively.

Hence, the market focus will remain glued to the FOMC monetary policy meeting minutes, due for release later during the US session. In the meantime, fading hopes for a diplomatic solution to end the war in Ukraine and concerns about more Western sanctions on Russia over its alleged war crimes should benefit the safe-haven greenback.

The fundamental backdrop seems tilted in favour of bearish traders and supports prospects for a further near-term depreciating move for the GBP/USD pair. With technical indicators still far from being in the oversold zone, spot prices seem vulnerable to sliding back to challenge the YTD low, around the 1.3000 psychological mark.

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 Dollar Edges Lower Ahead of Fed Minutes; Aussie Dollar Soars

The U.S. dollar traded in a tight range Tuesday, while the euro edged lower on talk of additional sanctions on Russia and the Australian dollar received a boost from a hawkish central bank.

At 3:00 AM ET (0700 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded marginally lower at 98.955, just below the one-week high of 99.083 reached overnight. 

The dollar has been drifting this week so far as investors await the arrival of the minutes from last month’s Federal Reserve policy meeting, due on Wednesday. 

Expectations are building that the central bank will move more aggressively at its meeting in May, especially after a jobs report that showed nonfarm payrolls increasing by 431,000 jobs last month while the unemployment rate fell to a new two-year low of 3.6%.

Ahead of the Fed minutes, Tuesday sees the release of ISM’s non-manufacturing PMI data for March, at 10:00 AM EST (1400 GMT), which is expected to show increased momentum in March, while speeches from Fed policymakers Neel Kashkari, Lael Brainard and John Williams will also be closely studied.

Elsewhere, AUD/USD rose 0.9% to 0.7607, jumping to a nine-month high, after the Reserve Bank of Australia left its benchmark interest rate unchanged at 0.1% at its latest policy setting meeting, but indicated that rate hikes were coming.

Australia’s central bank dropped its pledge to be "patient" on tightening policy in its statement following the decision, a phrase that has featured in every post-meeting release since November 2021, suggesting that it is going to hike sometime soon.

EUR/USD was largely unchanged at 1.0972, hovering above a one-week low, on talk of fresh sanctions on Moscow following alleged atrocities on civilians by Russian forces in the Ukrainian town of Bucha.

German Chancellor Olaf Scholz said that Putin and his supporters would "feel the consequences" of events in Bucha, while Biden's national security advisor, Jake Sullivan, stated that new U.S. sanctions against Moscow would be announced this week.

“It still seems that the EU is some way from weaning itself off Russian oil,” said analysts at ING, in a note. “Presumably, any moves from the EU toward a Russian oil embargo would see crude prices spike higher again and the euro come under pressure.”

USD/JPY fell 0.2% to 122.58, dropping back further from the multi-year high of 125.10 reached in late March after Bank of Japan Governor Haruhiko Kuroda stated that the recent pace of appreciation was "somewhat rapid," and policymakers are watching moves "carefully."

GBP/USD rose 0.1% to 1.3133, USD/CNY was flat at 6.3638, while USD/TRY rose 0.1% to 14.7092 the day after Turkey’s inflation jumped to a fresh 20-year high in March, with consumer prices rising an annual 61.1% through last month.

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 USD/JPY flirts with daily high, around 122.70-122.75 region post-US NFP report

• USD/JPY regained positive traction on Friday and snapped three successive days of the losing streak.
• The risk-on mood, the Fed-BoJ policy divergence weighed on the JPY and continued lending support.
• Elevated US bond yields, mostly upbeat US NFP data underpinned the USD and favours bullish traders.

The USD/JPY pair held on to its intraday gains, above the mid-122.00s through the early North American session and had a rather muted reaction to the US monthly jobs report.

The headline NFP print showed that the US economy added 431K jobs in March as against 490K expected, though the disappointment was offset by an upward revision of the previous month's reading to 750K. Additional details revealed that the unemployment rate dropped to 3.6% from 3.8% in February and Average Hourly Earnings grew 0.4% from the 0.1% previous.

The data reaffirmed market bets that the Fed would hike interest rates by 100 bps over the next two meetings to combat stubbornly high inflation. This was reinforced by elevated US Treasury bond yields, which underpinned the US dollar. On the other hand, the Japanese yen was weighed down by the Bank of Japan's commitment to aggressively defend its 0.25% yield cap.

This, along with a generally positive tone around the equity markets, dented demand for safe-haven JPY and acted as a tailwind for the USD/JPY pair. This marked the first day of a positive move in the previous four and assisted the pair to stall its pullback from levels above the 125.00 psychological mark, or the highest since August 2015 touched earlier this week.

With Friday's key data out of the way, the market focus shifts back to fresh developments surrounding the Russia-Ukraine saga. The incoming headlines will influence the broader market risk sentiment. This, along with the US bond yields and the USD price dynamics, should provide some impetus to the USD/JPY pair and allow traders to grab some short-term opportunities.

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Euro dips amid caution over Ukraine, Norwegian crown plunges

The euro edged lower on Thursday on caution about developments in Ukraine and limited progress in peace talks, while the Norwegian crown fell sharply after the central bank decided to buy foreign currency. Russian forces prepared for new attacks, Ukrainian President Volodymyr Zelenskiy said, while no quick resolution is expected from peace talks that will resume on Friday. The euro dropped 0.3% to $1.1118 after hitting its highest since March 1 at $1.1184. "The single currency is always around $1.11, with investors still cautious about future developments in Ukraine," Roberto Mialich, forex analyst at Unicredit (MI:CRDI), said. "The market wants to believe in a peace deal or at least in a truce in Ukraine. This is why rouble remains not far from its pre-war levels against the dollar, and the greenback is struggling to appreciate," he added.The dollar index, which tracks the U.S. currency against six peers, rose 0.2% to 98.074.

The rouble was down 3% versus the greenback at 78.55

Investors also focused on the next European Central Bank's moves after robust inflation data. ECB chief economist Philip Lane said on Thursday euro zone inflation was increasingly likely to stabilise around 2% but the ECB should be ready to change course if the outlook deteriorates due to Russia's war in Ukraine. [nL5N2VY2NL]

“Until the risk of an energy crisis and considerable economic effects resulting from the Ukraine war have been banished, the ECB is likely to hesitate to make a clear commitment,” Antje Praefcke, forex analyst at Commerzbank (DE:CBKG), said in a note to clients.

“And as a result, it will also be a while before the euro can appreciate on a sustainable basis,” she added.

Money markets are currently pricing in an around 85% chance of 20 basis points (bps) of ECB rate hikes by July 2022 and 60 bps by year-end. [IRPR]

The Norwegian crown plunged after oil prices dived and the central bank said it would buy foreign currency for its sovereign wealth fund in April.

Norges Bank plans to exchange 2 billion crowns ($231.9 million) per day into foreign currency, which will in turn be invested abroad by the wealth fund, already the world's largest with assets of $1.3 trillion.

The Norwegian currency fell 1.6% against the euro hitting its lowest level since March 18 of 9.7111, and 1.9% versus the dollar at 8.7255.

However, it is not far from its highest since October 2018 against the euro at 9.4424 and its highest since November 2021 versus the dollar at 8.5675, which it hit last week on the back of a rally in Brent crude oil futures.

"The central bank move might curb the currency, but we think the Norwegian crown still has room for further appreciation, thanks to expectations of more rises in energy prices," Unicredit's Mialich argued.

Other commodity currencies, such as the Australian and New Zealand dollar, dropped by around 0.5%.

The Swedish crown was slightly lower against the euro, just off its highest since January of 10.3059 hit on Wednesday as the central bank said it would have to tighten monetary policy this year.

Bitcoin was down 0.2% at $47,191, while Ether, the world's second-largest cryptocurrency, was up 0.45% at $3,402. 

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 GBP/USD rebounds from near two-week low, flat-lined below 1.3100 amid risk-on mood

• GBP/USD witnessed some intraday selling on Tuesday amid renewed USD buying interest.
• Hawkish Fed expectations, rising US bond yields continued acting as a tailwind for the buck.
• A positive risk tone capped gains for the safe-haven USD and helped limit losses for the pair.

The GBP/USD pair quickly recovered a few pips from a near two-week low touched in the last hour and was last seen trading around the 1.3175-1.3180 region, nearly unchanged for the day.

The pair struggled to preserve its modest intraday gains to the 1.3115 region and turned lower for the fifth successive day on Tuesday amid the emergence of fresh US dollar buying. Rising bets for a 50 bps rate hike at the next two FOMC meetings turned out to be a key factor that continued acting as a tailwind for the buck.

The market expectations for a more aggressive policy response by the Fed to combat high inflation was reinforced by elevated US Treasury bond yields. In fact, the yield on the benchmark 10-year US government bond moved back above the 2.5% threshold, or back closer to a nearly three-year peak and underpinned the greenback.

The British pound was further pressured by the overnight dovish sounding remarks by the Bank of England Governor Andrew Bailey, saying that they are seeing evidence of an economic slowdown. Bailey stuck to the tone from this monthly policy decision, wherein officials softened their language on the need for further interest rate hikes.

This was seen as another factor that exerted additional pressure on the GBP/USD pair. That said, a generally positive risk tone, bolstered by hopes for progress in the Russia-Ukraine peace talks, capped the safe-haven USD and helped limit the downside for the GBP/USD pair. This, in turn, warrants some caution for bearish traders.

Hence, the market focus will remain glued to fresh developments surrounding the Russia-Ukraine saga. The incoming geopolitical headlines will influence the broader market risk sentiment. This, along with the US bond yields, will drive demand for the USD and produce some short-term trading opportunities around the GBP/USD pair.

Later during the early North American session, traders will take cues from the US economic docket - featuring the release of JOLTS Job Openings and the Conference Board's Consumer Confidence Index.

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