- GBP/USD drifts lower for the fourth straight day and is pressured by a modest USD strength.
- Expectations for a less hawkish Fed and the risk-on mood to cap gains for the safe-haven buck.
- Rising bets for more aggressive BoE rate hikes should help limit losses ahead of the UK CPI.
The GBP/USD pair remains under some selling pressure for the fourth successive day on Wednesday and retreats further from its highest level since April 2022, around the 1.3140 region touched last week. The steady descent drags spot prices to a four-day low during the Asian session, though bulls manage to defend the 1.3000 psychological mark, at least for the time being.
The US Dollar (USD) gains some positive traction and looks to build on the overnight bounce from a 15-month low, which, in turn, exerts downward pressure on the GBP/USD pair. Data released on Tuesday showed that the core US Retail Sales – excluding automobiles, gasoline, building materials and food services – remained resilient in June and raised doubts if the Federal Reserve (Fed) will commit to a more dovish policy stance. This, in turn, is seen as a key factor lending some support to the Greenback.
The markets, however, have been pricing out the possibility of any further Fed rate hikes after the widely expected 25 bps lift-off at the upcoming policy meeting on July 25-26. This is reinforced by the ongoing decline in the US Treasury bond yields, which, along with the underlying bullish sentiment around the equity markets, should keep a lid on the safe-haven buck. Apart from this, rising bets for a more aggressive tightening by the Bank of England (BoE) should act as a tailwind for the GBP/USD pair.
In fact, interest-rate swaps indicate that the BoE could raise interest rates from the current 5% to a cycle peak of 6.5% – the highest since 1998 – to dampen demand and force inflation lower. The bets were lifted by stronger UK wage growth data, which, according to BoE Governor Andrew Bailey and UK Finance Minister Jeremy Hunt, is harming the efforts to contain inflation. Furthermore, Bailey, though expects the pace of price growth should fall sharply this year, noted last week that inflation is still far too high.
Hence, the market focus will remain glued to the latest UK CPI report, due later this Wednesday, which will play a key role in influencing the BoE’s near-term policy outlook and provide a fresh impetus to the British Pound. Later during the early North American session, traders will take cues from the US housing market data – Building Permits and Housing Starts. Nevertheless, the aforementioned fundamental backdrop supports prospects for the emergence of some dip-buying around the GBP/USD pair.
