The GBP/USD pair is at the forefront, hovering around 1.2710 during the Asian session on Wednesday, after a recent dip that interrupted a four-day winning streak for the Pound Sterling (GBP) against the US Dollar (USD). The pair experienced support as market risk appetite initially improved, driven by comments from Federal Reserve (Fed) members speculating about potential rate cuts by the end of 2024. However, a sudden shift towards risk aversion exerted pressure on the GBP/USD pair.
The US Dollar Index (DXY) is consolidating near 102.50 after recent gains, attempting to extend profits on improved US Treasury yields. The 2-year and 10-year yields on US bond coupons stand at 4.36% and 4.02%, respectively.
The risk-on sentiment triggered by the Fed’s remarks has contributed to the weakening of the US Dollar. Atlanta Fed President Raphael W. Bostic and US Fed Governor Michelle W. Bowman both hinted at the possibility of rate cuts by the end of 2024, citing concerns about declining inflation.
The recent strength in the GBP/USD pair is influenced by monetary policy divergences between the Bank of England (BoE) and the US Federal Reserve (Fed). The BoE has maintained its stance on further rate hikes, while expectations are building that the Fed may initiate an easing cycle as early as March.
DeAnne Julius, a former BoE monetary policy committee member, has expressed a different view, stating that the Bank of England won‘t be in a position to start cutting interest rates in 2024. She also highlighted the potential impact of escalating tensions in the Middle East, leading to a new round of energy price increases and triggering a new inflation shock.
BoE Governor Andrew Bailey’s speech is anticipated on Wednesday, and UK Manufacturing Production data is expected to be released on Friday, showing growth in November. On the US docket, December’s Consumer Price Index (CPI) data will be released on Thursday, providing crucial insights into inflation dynamics and influencing market expectations regarding the Fed’s monetary policy stance.