- GBP/USD breaks above the 1.2700 level amid widespread USD weakness and risk aversion.
- Despite the recent BoE rate hike, market fears of a possible UK Recession persist.
- Investors expect a further 50 basis point rate hike from the BoE at the end of 2023 amid persistent inflation.
He GBP/USD It rises after falling to last week’s lows at 1.2685, breaking above the 1.2700 level amid risk aversion momentum and broad-based US dollar (USD) weakness. The 50 basis point rate hike announced last week by the Bank of England weakened the British Pound (GBP) on fears that a rate hike could trigger a recession in the UK. However, GBP/USD is holding on to its 0.03% gains and trading at 1.2718.
Pound Recovers Ground Despite Market Sentiment of Dread; rate hike expectations are reduced
GBP/USD holds on to its gains as the dollar weakens on risk aversion. In the US, the economic agenda has been thin with traders focusing on last week’s data and the Fed’s remarks over the weekend. New York Fed President John Williams noted that “restoring price stability is of the utmost importance because it is the foundation of sustained economic and financial stability.” Price stability is not a dilemma, it is a necessity.”
Earlier this morning, the Dallas Fed Manufacturing Index for June came in at -23.2, beating forecasts but still in recessionary territory, portraying a slowdown in the US economy. Although it contracted, it was the one that improved the most in the last three months.
Market Participants mostly ignored the data, as GBP/USD’s reaction was muted. Speculators reduced their bets on a Federal Reserve (Fed) rate cut in 2023; they expect a 25 basis point rate hike in the remainder of 2023, according to data from CME’s FedWatch tool. Policy makers revised the FFR to above 5.50%, but investors do not believe the Fed will go above 5.50%, as the swap market shows.
The US Dollar Index (DXY), which measures the performance of six currencies against the US Dollar (USD), was down 0.17% to 102.696, weighed down by falling US Treasury yields.
On the other hand, the UK economic calendar was absent, although a Reuters poll showed investors expect the Bank of England (BoE) to raise borrowing costs by 50 basis points by the end of 2023. Inflation data from last week in the UK opened the door for a surprising 50 basis point rate hike by the BoE, while raising the odds of further tightening amid stubbornly high inflation.
While a rate hike often appreciates a country’s currency, raising borrowing costs, the opposite has occurred in the UK as the economy continues to deteriorate and mortgage rates rise. This raised fears that the British economy was going into recession. Therefore, speculators piled in and sold GBP/USD.
GBP/USD Price Analysis: Technical Perspective
Technically, GBP/USD remains biased to the upside, but to continue its uptrend, buyers need to make a daily close above the June 23 high at 1.2749. In that case, GBP/USD could extend its gains beyond 1.2800 and retest the year-to-date high of 1.2748. Conversely, this would compound the GBP/USD slide towards the 1.2600 area, exposing the 20-day EMA at 1.2641 as first resistance. A break of the latter will expose the psychological figure of 1.2600.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
