- GBP/USD regains positive traction on Tuesday amid fresh selling around the dollar.
- Bets on a lower Fed rate hike, falling US bond yields and a positive risk tone undermine the dollar.
- A bleak outlook for the UK economy could act as a headwind for the British pound and limit the pair.
The pair GBP/USD it attracts new buying in the 1.1800 area and reverses much of the overnight loss. The pair maintains its offered tone during the early American session and is currently around the 1.1870 area, just a few points below the daily high.
The US dollar comes under renewed selling pressure and its recent strong rebound from the lowest level since August 12 stalls, which in turn offers GBP/USD support. Increasing bets on relatively minor interest rate hikes by the Federal Reserve appear to weigh on US Treasury yields and keep dollar bulls on the defensive. Apart from this, a modest recovery in risk sentiment globally is seen further undermining the safe-haven dollar.
On the other hand, sterling is supported by expectations that the Bank of England will continue to raise borrowing costs to combat persistent inflation. Apart from this, reports that the UK government privately discussed the possibility of a Swiss-style relationship with the European Union further prop up sterling. This, in turn, provides an additional boost to the GBP/USD pair, although the gloomy outlook for the UK economy could limit gains.
In fact, the UK’s Office for Budget Responsibility (OBR) last week projected that UK GDP will fall by 1.4% next year, up from 1.8% growth forecast in March. Apart from this, concerns about economic headwinds stemming from a new outbreak of COVID-19 in China and the imposition of new lockdowns should dampen any optimism in the markets. This, coupled with recent hawkish signals from various Fed officials, could cap the dollar’s losses and cap GBP/USD.
Therefore, the focus of the markets will continue to be the release of the minutes of the November FOMC policy meeting, which will be released on Thursday. Investors will be looking for clues about the Fed’s policy outlook and the future path of rate hikes. This will influence the dynamics of the dollar price and determine the short-term path of the GBP/USD pair. Meanwhile, traders will be watching the Richmond Manufacturing Index release and Cleveland Fed President Loretta Mester’s speech for momentum on Tuesday.
Technical levels to watch
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
