- GBP/USD makes a modest intraday rebound from the multi-day low hit this Friday.
- The dollar pulls back amid repositioning trade ahead of the NFP, offering support to the pair.
- Concerns over the UK government’s fiscal plans and recession fears should cap the pair’s gains.
The GBP/USD reverses an intraday drop to a multi-day low around the 1.1115 area and rises to new daily highs during the European session. The pair breaks back up again above the 1.1200 levelalthough it lacks bullish conviction.
The US dollar is slightly off the weekly high, which turns out to be a key factor lending some support to the GBP/USD pair. The modest drop in the dollar could be attributed solely to the trade repositioning ahead of the release of monthly US employment data., which will be published later during the American session. Having said that, Prospects for more aggressive policy tightening by the Fed, coupled with the prevailing risk aversion environment, should limit any significant USD pullback..
In fact, market participants appear to be convinced that the US central bank will continue to raise rates at a faster pace to curb inflation and they have been pricing in another 75 basis point hike in November. This continues to support elevated US Treasury yields. On the other hand, concerns that rapidly rising borrowing costs will cause a deeper global economic recessiontempers investors’ appetite for higher-risk assets. The flow of risk aversion money should give some support to the dollar, which is a safe haven.
Also, concerns about the UK government’s fiscal policy and looming recessionary risks could also help limit GBP/USD gains. UK Prime Minister Liz Truss on Wednesday defended the tax cut plan, saying that lowering taxes is the moral and economic right thing to do. The fiscal package is expected to derail the Bank of England’s efforts to contain high inflation and force it to become more aggressive, which in turn would create headwinds for the economy.
The aforementioned fundamental background warrants caution among aggressive investors and before positioning for any further appreciation moves for the GBP/USD pair. Investors might also prefer to stay on the sidelines and wait for the release of the US NFP report. US labor market data will play a key role in influencing Fed rate hike expectations and boosting dollar demand in the near term. This, in turn, should allow traders to take advantage of some short-term opportunities around the pair.
GBP/USD technical levels
Source: Fx Street
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