GBP/USD hangs near its lowest level since early May, seems vulnerable below 1.2700
|- GBP/USD is seen consolidating its recent losses to over a one-month low touched on Friday.
- The Fed’s hawkish outlook continues to underpin the USD and exerts pressure on the major.
- The divergent Fed-BoE policy expectations could lend some support and limit deeper losses.
The GBP/USD pair struggles to capitalize on Friday's modest bounce from the vicinity of mid-1.2600s or a nearly one-month low and oscillates in a narrow band on the first trading day of a new week. Spot prices now seem to have found acceptance below the 1.2700 round-figure mark and could decline further amid a bullish sentiment surrounding the US Dollar (USD).
In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, stands tall near its highest level since early May touched on Friday in the wake of the Federal Reserve's (Fed) hawkish surprise last week. In the so-called "dot plot", policymakers projected only one interest rate cut in 2024 as compared to three in March. This remains supportive of elevated US Treasury bond yields and acts as a tailwind for the buck, validating the negative outlook for the GBP/USD pair.
That said, weaker-than-expected US consumer and producer prices data released last week pointed to signs of easing inflationary pressures. Adding to this, an unexpected fall in the US import prices further boosted the domestic inflation outlook, which, along with a sharp deterioration in the US consumer sentiment in June, keeps hopes alive for the first Fed rate cut move in September and the second cut in December. This might cap gains for the USD and help limit losses for the GBP/USD pair.
Market participants, meanwhile, expect that more persistent price pressures in the UK might force the Bank of England (BoE) to keep interest rates at their current level for a little bit longer. This might hold back bearish traders from placing aggressive bets around the British Pound (GBP) ahead of this week's release of the UK CPI report. Moreover, the upcoming UK general election on July 4 warrants some caution before positioning for any further depreciating move for the GBP/USD pair.
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