GBP/USD is trading around 1.2770 in early European hours, marking its second consecutive day of appreciation. The pair’s upward movement is fueled by growing anticipation of a rate cut by the US Federal Reserve (Fed) in September.
According to the CME FedWatch tool, markets are fully pricing in a quarter-point interest rate reduction by the Fed next month. Additionally, the drop in US Treasury yields is putting further pressure on the Greenback, with yields currently at 4.01% and 3.97%.
Kansas City Fed President Jeffrey Schmid recently mentioned that a reduction in monetary policy could be warranted if inflation remains low. He highlighted that the Fed’s current policy is not overly restrictive and that although the central bank is close to its 2% inflation target, it has not yet fully achieved it.
Meanwhile, the Pound Sterling faced obstacles following the Bank of England’s decision to cut interest rates from a 16-year high. The BoE lowered rates by a quarter-point to 5% after a narrow vote among policymakers, who were divided on the easing of inflation pressures.
Despite the positive momentum of GBP/USD, the pair’s upside potential may be limited due to increased safe-haven flows amid escalating geopolitical tensions in the Middle East. Israeli airstrikes in the Gaza Strip led to significant casualties on Thursday, further intensifying the conflict between Israel and Hamas-led militants.
Analysis and Implications:
The ongoing strength of GBP/USD is directly linked to market expectations of a Fed rate cut, which is driving the pair higher. The likelihood of a rate reduction is also reflected in the decline of US Treasury yields, which is weakening the US Dollar against the British Pound.
On the other hand, the Bank of England’s recent interest rate cut has introduced some volatility in the Pound Sterling, impacting its exchange rate with the US Dollar. Additionally, geopolitical tensions in the Middle East are creating a risk-off sentiment, leading to increased demand for safe-haven currencies like the USD.
For investors and traders, it is crucial to monitor central bank policies, economic data releases, and geopolitical developments that can influence currency movements. Understanding these factors can help make informed decisions when trading GBP/USD and other currency pairs.