The GBP/USD pair gained notable momentum during the Asian session on Friday, reaching a two-week high around the 1.2715 mark. The pair has surged over 200 pips from its weekly low, supported by the US Dollar‘s (USD) weakening demand. This builds on a recent recovery from sub-1.2500 levels, which marked the lowest point since May 2024.
USD Struggles Amid Rate Cut Expectations
The USD Index (DXY), which tracks the Greenback against a basket of major currencies, failed to capitalize on modest gains from the previous day, hovering near a two-week low. Market participants are increasingly betting on another 25 basis point rate cut by the Federal Reserve (Fed) in December, with current market pricing reflecting a 70% probability of this move. This expectation, along with a recent decline in US Treasury bond yields, has put the USD bulls on the defensive and provided tailwinds for the GBP/USD pair.
UK Economic Data Supports the Pound
Meanwhile, data released last week showed that underlying price growth in the UK picked up speed in October, which has led traders to scale back their bets on another interest rate cut by the Bank of England (BoE) this year. This shift in expectations has supported the British Pound (GBP), enabling it to outperform its US counterpart. These factors contribute to a positive outlook for GBP/USD, although several challenges remain for the pair.
US Inflation and Geopolitical Risks Limit USD Losses
Despite the weakening of the USD, a combination of factors may prevent significant further gains for GBP/USD. US PCE data released on Wednesday indicated that progress in reducing inflation stalled in October, while investors are increasingly convinced that US President-elect Donald Trump’s expansionary policies will drive inflation higher. Additionally, hawkish minutes from the recent Federal Open Market Committee (FOMC) meeting suggested that the Fed may pause its rate cuts if inflation remains elevated.
Geopolitical risks, including trade war concerns, further support the USD’s safe-haven status, which could limit the upside potential for the GBP/USD pair.
Outlook for GBP/USD
Although the GBP/USD pair is on track to extend its recent gains, factors such as US inflation dynamics, potential rate cuts from the Fed, and geopolitical risks may keep the pair in check. Traders will be closely monitoring upcoming economic data for clearer signals, with the potential for further fluctuations in the currency pair as these issues evolve.
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