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USD Weakness Causes the GBP/USD to Advance Higher, But Upside Potential Appears Limited
The GBP/USD pair attracts investors for the second consecutive day, although their enthusiasm is not bullish. Increasing expectations that the BoE will soon reduce interest rates continue to restrain the GBP's gains. Three anticipated rate decreases by the Fed in 2024 maintain the USD on the defensive and provide support.
During the Asian session on Tuesday, the GBP/USD pair trades with a slight positive bias, but lacks follow-through purchasing and remains below the overnight swing high, or the mid-1.2600s. In contrast, bearish traders are favored by the fundamental environment, which necessitates caution prior to positioning for a continuation of the recent recovery from the 1.2475 region, which marked the five-week low reached last Friday.
Andrew Bailey, governor of the Bank of England (BoE), stated last week that anticipations of interest rate reductions this year were not irrational. This transpires subsequent to a shift in stances by two policymakers at the Bank of England (BoE) from advocating for increased rates to maintaining borrowing costs at 5.25%. This development may further erode the value of the British Pound (GBP). In contrast, the US Dollar (USD) halts the corrective retracement that occurred the day before near the monthly peak due to the positive prognosis for the US economy. This further restricts the GBP/USD pair's potential for appreciation.
In addition, a number of Fed officials voiced apprehension regarding resistant inflation and US macro data that surpassed initial projections. In fact, Atlanta Fed President Raphael Bostic anticipates a moderate deceleration in both the US economy and inflation this year and foresees only one rate reduction. In a separate statement, Austan Goolsbee, president of the Federal Reserve Bank of Chicago, emphasized the necessity for the central bank to achieve a balance between its dual mandate and inflation progress. In the interim, Federal Reserve Governor Lisa Cook cautioned against premature or excessive policy easing, as well as being too late, given the arduous and inconsistent trajectory of disinflation.
Conversely, the Federal Reserve indicated last week that it maintains its course to reduce interest rates by 75 basis points this year, thereby presenting an impediment to the yields on US Treasury bonds. This, coupled with the prevailing bullish sentiment observed in the equity markets, could potentially deter traders from engaging in excessive bullish wagers concerning the safe-haven US dollar, thereby providing some assistance to the GBP/USD pair. For a renewed impetus, market participants are currently focusing on the US economic agenda, which includes Durable Goods Orders, the Conference Board's Consumer Confidence Index, and the Richmond Manufacturing Index.
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