- GBP/USD rises sharply on Friday amid widespread USD weakness.
- Risk appetite weighs on the safe-haven USD.
- Expectations of the Fed’s aggressive rate hike and gloomy UK economic outlook could limit the pair’s gains.
The pair GBP/USD gains strong positive traction on Friday and continues to climb higher during the early part of the European session. Momentum lifts the pair to a one and a half week high, near the 1.1650 regionand is supported by the selling tone surrounding the US dollar.
A good risk sentiment recoveryas shown by the positive tone surrounding stock markets, drags safe-haven USD lower, with the dollar index retreating from two-decade highs hit earlier this week. In fact, the key dollar index falls to a new monthly low, which turns out to be a key factor for the intraday momentum of the GBP/USD pair to the upside.
On the other hand, the British pound receives the support for new UK Prime Minister Liz Truss’s plans to cap energy bills for the next two years, which is considered a positive development for households. That said, the worsening outlook for the UK economy could continue to act as a headwind for sterling. Apart from this, the very aggressive Fed expectations should limit the corrective pullback in the dollar and limit the GBP/USD pair.
The markets seem convinced that the Fed will maintain its aggressive tightening policy to control inflation and have been pricing in a higher probability of a 75 basis point rate hike at the September meeting. Expectations were bolstered by hawkish comments from Fed Chairman Jerome Powell on Thursday, which underpinned elevated US Treasury yields.
Therefore, it will be prudent to wait for strong continuation buying before confirming that the GBP/USD has formed a short-term bottom around the 1.1400 level and positioning for further upside. In the absence of major economic releases, speeches from Fed officials could weigh on the dollar during the early part of the American session and give the GBP/USD pair some momentum.
GBP/USD technical levels
Source: Fx Street
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