The GBP/USD pair was trading around 1.2770 during early European hours on Friday, marking its second consecutive day of appreciation. This upward movement can be attributed to growing market expectations that the US Federal Reserve (Fed) will implement a rate cut in September.
The CME FedWatch tool indicates that markets are now fully anticipating a 25-basis point rate reduction by the Fed this month. Additionally, the decline in US Treasury yields is placing further downward pressure on the US dollar, with yields currently at 4.01% and 3.97%, respectively.
On Thursday, Kansas City Fed President Jeffrey Schmid suggested that a reduction in monetary policy might be “appropriate” if inflation remains subdued. Schmid pointed out that while the Fed is approaching its 2% inflation target, current policy is “not that restrictive” and has not yet fully achieved the goal, according to Reuters.
Meanwhile, the British Pound has faced challenges following the Bank of England’s (BoE) decision to cut interest rates from a 16-year high. Last week, the BoE reduced rates by 25 basis points to 5%, following a narrow vote among policymakers who were split on whether inflation pressures had sufficiently eased.
The potential for further gains in GBP/USD might be constrained by increased safe-haven flows due to escalating geopolitical tensions in the Middle East. Israeli airstrikes on the Gaza Strip intensified on Thursday, resulting in at least 40 casualties, as reported by Palestinian medics.
The conflict between Israel and Hamas-led militants has further intensified, with Israel preparing for a possible broader regional conflict following the deaths of senior members of Hamas and Hezbollah.
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