GBP/USD

The GBP/USD pair is currently hovering just below its new year-to-date highs of 1.2593 against the US Dollar (USD) following the European Central Bank (ECB) announcement of a 25 bps rate hike on its main refinancing operations, marginal lending facility, and deposit facility. 

The accompanying policy statement emphasized the need for continued efforts to control inflationary headwinds in the euro area. Despite this, the Euro reacted in a broadly bearish manner, which could cause further unexpected volatility to Euro and US Dollar pairs and crosses, depending on ECB President Christine Lagarde’s ongoing press conference.

From a technical viewpoint, GBP/USD continues to edge higher within a range, which is part of a broader bullish trend that began at the September 2022 lows. Longs are, therefore, favored over shorts.

In contrast to the Federal Reserve, which has probably reached peak rate, the ECB is likely to continue raising rates in the future. Meanwhile, the Bank of England (BoE) may have to hike interest rates in the UK more than once to control inflation, which is currently above 10% for the seventh consecutive month. These factors are medium-term bullish for Pound Sterling.

The Nonfarm Payrolls (NFP) jobs report, scheduled for release on Friday, may inject further volatility into GBP/USD depending on whether it misses expectations (bearish for USD, bullish for GBP/USD) or comes out substantially higher (bullish for USD, bearish for GBP/USD).

Other market-moving factors include the Bank Lending Survey (BLS) for Q1, which showed that while credit conditions had tightened, there were no outsized risks to Eurozone banks due to the crisis. 

Additionally, depositors in Europe face more obstacles in reallocating funds into higher-yielding vehicles compared to their US counterparts, reducing systemic risk. On Wednesday, the Federal Reserve raised its interest rates by 25 bps to 5-5.25% and dropped wording that suggested further hikes may be appropriate, triggering a USD sell-off.

The market gauges suggest a 95% probability of no future hikes from the Fed. Furthermore, Powell’s hawkish statement regarding the labor market being “very tight” indicates that labor demand is currently above supply. 

US Initial Jobless Claims, due at 12:30 GMT on Thursday, and the April Nonfarm Payrolls report, expected to show 179K new jobs, could impact the USD.

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