GBP/USD has retraced its recent losses, trading around 1.2710 during Wednesday’s Asian session. This upward movement is attributed to a weakening US Dollar (USD), driven by rising expectations of a more aggressive rate cut by the US Federal Reserve (Fed) following weaker-than-expected July employment data, which has stoked fears of a looming recession.
Fed Rate Cut Speculation Grows
The probability of a 50-basis point (bps) interest rate cut by the Fed in September has surged to 67.5%, up from 13.2% just a week earlier, according to the CME FedWatch tool. This shift in market sentiment follows remarks from Federal Reserve Bank of San Francisco President Mary Daly, who indicated a more balanced risk outlook for the Fed’s mandates and openness to rate cuts in upcoming meetings. Additionally, Chicago Fed President Austan Goolsbee affirmed the central bank‘s readiness to act if economic or financial conditions deteriorate.
Challenges for the British Pound
Across the Atlantic, the Pound Sterling (GBP) faces its own challenges. The Bank of England (BoE) implemented a widely anticipated 25-basis point rate cut at its August meeting, with market expectations now including the possibility of two additional quarter-point cuts by December. This outlook could cap the British Pound’s potential gains.
Geopolitical Risks Weigh on Market Sentiment
Global risk aversion remains a limiting factor for the GBP/USD pair. Concerns over escalating conflicts in the Middle East intensified after Iran-backed Hezbollah launched numerous missiles at Israel, responding to the assassination of Hamas leader Ismail Haniyeh by an Israeli airstrike in Tehran. This geopolitical tension adds to the cautious market sentiment, potentially restraining further gains for the Pound.
In summary, while the GBP/USD is benefiting from a weaker USD and heightened Fed rate cut expectations, the Pound’s upside is constrained by both BoE rate cut prospects and global geopolitical uncertainties.
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