- GBP/USD witnessed heavy selling on Friday amid a strong rally in USD demand.
- Uncertainty over the magnitude of the Fed rate hike prompted some short-covering of the dollar.
- The gloomy economic outlook from the Bank of England undermines the GBP and contributes to the decline.
The pair GBP/USD comes under renewed selling pressure on Friday and falls to the 1.2100 area during the early American session.
On the last day of the week, the US dollar recovers strongly and moves away from its lowest level since the end of June, reached the previous day. This turns out to be a key factor putting downward pressure on the GBP/USD pair, which is not benefiting from mostly better-than-expected macro releases from the UK.
However, the preliminary GDP report showed that the British economy contracted 0.1% in the second quarter, compared to a 0.8% increase in the previous quarter. The dismal figure validates the Bank of England’s view that a prolonged recession would start in the fourth quarter and acts as a headwind for the British pound.
The dollar, meanwhile, is witnessing a short-covering move amid uncertainty over the magnitude of the Federal Reserve’s next rate hike. Data released this week showed signs of easing in US inflationary pressures and forced investors to cut bets on a 75 basis point Fed rate hike at the September meeting.
However, recent comments from several Fed officials suggest that the US central bank will maintain its tightening policy. This, in turn, leads traders to lighten their bearish bets on the dollar, although a combination of factors could cap gains and help limit GBP/USD’s decline.
However, the pair reverses much of the weekly gains and remains at the mercy of the dynamics of the dollar price. Following is the release of the preliminary US Consumer Sentiment Index from Michigan, which could influence the dollar and produce some trading opportunities around the GBP/USD pair.
Technical levels to watch
Source: Fx Street
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