GBP/USD Holds Positive Outlook Amid Balanced BoE and Fed Rate Expectations, Eyes on Key U.S. Inflation Data
The GBP/USD pair has pulled back from Tuesday’s nine-week high of 1.2801 but continues to show a positive outlook, staying near the March 8 high of 1.2894. The balanced rate expectations from both the Bank of England (BoE) and the Federal Reserve (Fed) have neutralized any yield advantage for the dollar. This balance is reflected in the longer-term daily moving averages, with current spot rates well above the 100-DMA at 1.2635 and the 200-DMA at 1.2541, indicating a shift away from dovish outlooks by both central banks. However, the recent gains in sterling, driven by stronger-than-expected UK CPI data, face a potential challenge on Friday with the release of the U.S. April PCE index data. This data will be crucial in assessing the Fed’s progress in controlling U.S. inflation. If the data aligns with forecasts, markets may push back expectations for a Fed rate cut, keeping GBP/USD near current levels. Conversely, higher-than-expected data could elevate expectations for further Fed rate hikes, putting pressure on GBP/USD, while a softer print might strengthen the case for quicker U.S. rate cuts, potentially driving the pound towards the 2024 high of 1.2894.
In the North American afternoon session, sterling has softened, trading at -0.42% at 1.2708, within the Wednesday range of 1.2772-1.2706. The dollar remains broadly firm as U.S. Treasury yields rise, despite larger UK rate hikes. The slip in sterling from Tuesday’s high is largely due to anticipation of upcoming inflation data and rate guidance. Recent GBP gains have been cautious ahead of significant eurozone and U.S. inflation data expected on Friday. The policy paths for both the U.S. and UK in 2024 appear similar, with nearly 50% odds for the first rate cut and a 30 basis point reduction by the end of the year. Momentum favors GBP bulls above 1.2596, the 50% Fibonacci retracement of the 1.2894-1.2299 move, with support levels at Wednesday’s low of 1.2706, the May 24 daily low of 1.2676, and the 100-DMA at 1.2635. Resistance is identified at the 50% retracement of 1.2801-1.2706 at 1.2754, Wednesday’s high at 1.2772, and the upper 30-day Bollinger Band at 1.2812.
