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GBP/USD Faces Headwinds Amid Strong US Dollar, Lower BoE Rate Hike Expectations

The GBP/USD currency pair initially saw gains, driven by optimistic UK retail sales data. However, these gains were counteracted by a surge in the US Dollar’s strength. The latest UK inflation report led to a reassessment of the Bank of England’s (BoE) interest rate expectations, with the swaps market now projecting a 50% chance of a 50 basis points rate hike. Simultaneously, robust US economic data, particularly lower-than-expected unemployment claims, raised concerns about the Federal Reserve’s (Fed) potential tightening of monetary conditions after its upcoming meeting.

GBP/USD declined during the North American session as news from Japan bolstered the US Dollar’s position against most G7 currencies. The pair currently trades at 1.2851, representing a slight loss of 0.012%, after reaching a daily high of 1.2904.

The decline in GBP/USD came following news from the Asian session, which triggered flows towards the US Dollar. A report by Reuters indicated that the Bank of Japan (BoJ) would maintain its YCC (Yield Curve Control) program and adopt a dovish stance, contributing to the weakening of GBP/USD. This came despite the earlier upward movement in the pair after upbeat retail sales data was released in the UK. Nonetheless, the overall strength of the US Dollar weighed down on GBP/USD.

Furthermore, the most recent UK inflation report eased pressure on the Bank of England, which had been expected to raise interest rates by 50 basis points at its upcoming meeting on August 3. The cooling inflation triggered a reevaluation of the market’s expectations, with analysts adjusting their outlook, as evidenced by the swaps market, now assigning a 50% probability of a 50 basis points rate hike.

Meanwhile, solid US economic data, particularly last week’s unemployment claims, reignited concerns that the Federal Reserve might move towards tightening monetary conditions after its next meeting. Although some other data during the day showed mixed results, with US retail sales missing estimates but indicating consumer resilience, the housing market witnessed a dip after posting positive figures in May.

As a result of these developments, expectations of a rate hike by the Fed beyond the July meeting surged to 28%, up from last month’s 15.9% odds, as revealed by the CME FedWatch Tool. Consequently, the US Dollar gained strength, achieving more than 1% in weekly gains. Currently, the US Dollar Index (DXY), which measures the USD against six major peers, stands at 101.052, showing a 0.23% increase on Friday.

Looking ahead, the GBP/USD might remain relatively stable before the Federal Open Market Committee’s (FOMC) monetary policy meeting. However, if Fed Chair Powell adopts a hawkish tone during his press conference, that could put downward pressure on GBP/USD ahead of the Bank of England’s meeting on August 3.

Technical Outlook for GBP/USD:
On the daily chart, the GBP/USD pair still exhibits an upward bias, despite a recent 1.84% pullback from its yearly high of 1.3160 to 1.2815. The decline found support at the 61.80% Fibonacci level at 1.2851, which formed a spinning-top candle followed by a bearish candle. If the next candle turns bullish and closes above 1.2906, it would create a bullish chart pattern known as a ‘morning star,’ suggesting further upside potential. In such a scenario, the next resistance levels would be around the 38.2% Fibonacci level at 1.2961, followed by a test of the 1.3000 mark.

However, if the GBP/USD fails to maintain its bullish momentum, it might consolidate below the 20-day Exponential Moving Average (EMA) at 1.2865, with potential sellers eyeing the 78.6% Fibonacci retracement at 1.2773.

(Note: This information is for illustrative purposes only and does not constitute financial advice. Trading in the forex market involves risks, and traders should conduct their analysis and consider their risk tolerance before making any trading decisions.)