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GBP/USD scales higher for the second straight day and remains supported by a weaker US Dollar.
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Dovish Fed expectations and the optimism over Chinese stimulus undermine the safe-haven buck.
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Bets that the BoE will start cutting rates during the first half of 2024 might cap gains for the major.
The GBP/USD pair attracts some dip-buying following an early dip to the 1.2440 area on Monday and builds on its steady ascent through the early part of the European session. Spot prices climb back closer to the 1.2500 psychological mark, with bulls now awaiting a sustained move and acceptance above the 100-day Simple Moving Average (SMA) before placing fresh bets.
US dollar (USD) selling bias remains unabated on dovish Federal Reserve (Fed) expectations, pushing the GBP/USD pair higher for the second day in a row. Investors are now confident that the US central bank is done with its policy tightening campaign and the bet was reaffirmed by the soft US CPI report released last week. Moreover, markets are now pricing in the possibility that the Fed will start cutting rates as soon as March 2024.
A shift in expectations for the Fed’s future policy action dragged the yield on the benchmark 10-year US government bond to a two-month low on Friday. Also, the latest optimism over additional stimulus from China is another factor undermining the greenback’s safe-haven status and lending support to the GBP/USD pair. In fact, Chinese officials have promised to roll in more policy support for the country’s troubled real estate sector, boosting investor confidence.
With USD price dynamics becoming the sole driver of positive moves for the GBP/USD pair, bulls are unfazed by the fact that markets expect the Bank of England (BoE) to start cutting interest rates from their 15-year highs. Indeed, interest rate futures have fully priced in a BoE rate cut of 25 bps for August 2024 and a second rate cut in November 2024. Moreover, there is a more than 50% chance that the BoE will start the policy easing cycle by June 2024. .
In the absence of any relevant market-moving economic releases, either from the UK or the US, the mixed fundamental backdrop makes it prudent to wait for a breakout through the 100-day SMA before placing new bullish bets. Market participants now await scheduled speeches by BoE Governor Andrew Bailey and Richmond Fed President Thomas Barkin to provide short-term trading opportunities later in the first North American session.
Technical levels to watch
GBP/USD
