GBP/USD Rally Fueled by Fed Pause Speculation and US Debt Ceiling Concerns

The GBP/USD pair is currently hovering above the 1.2450 level and shows potential for further gains.

Arslan Butt•Monday, May 22, 2023•2 min read

The GBP/USD pair is currently hovering above the 1.2450 level and shows potential for further gains. This upward momentum is driven by speculation that the Federal Reserve (Fed) may pause its policy-tightening measures due to tight credit conditions at US regional banks. In addition, concerns about a potential default by the US Treasury have put downward pressure on the US Dollar Index (DXY), which is currently near its daily low around 103.00.

During early Asian trading, S&P500 futures have managed to recover from previous losses, but caution remains prevalent in the market. Last week, US equities ended on a negative note after President Joe Biden rejected partisan terms offered by House Speaker Kevin McCarthy for raising the US debt ceiling.

The USD Index is expected to remain volatile as any further delays in raising the borrowing cap could have serious implications for the US economy, potentially pushing it closer to recession. Investors have shown slight optimism as demand for US government bonds has rebounded, anticipating that President Biden may exercise his 14th Amendment right to raise the borrowing cap without requiring Republican approval.

President Biden’s dismissal of McCarthy’s bipartisan offer as “unacceptable” has added uncertainty to the situation. The Republicans are demanding significant spending cuts in exchange for raising the US borrowing cap, while President Biden is proposing more moderate cuts in education and law enforcement programs. The political standoff also raises concerns about Republicans hindering Democratic chances of re-election in 2024.

Despite these political uncertainties, investors remain less worried about the possibility of President Biden using his 14th Amendment right to prevent a US default, as it could lead to interest rate spikes and create chaos in financial markets. However, the White House is uncertain whether they have enough time to explore this untested approach.

The dovish statement made by Federal Reserve Chair Jerome Powell on interest rate guidance has provided support to Asian markets, highlighting the impact of tight credit conditions at US regional banks on the central bank’s decision to hold interest rates steady for the time being. Minneapolis Federal Reserve President Neel Kashkari has also expressed support for maintaining interest rates in the June monetary policy meeting, as the Fed needs more time to assess the effects of past rate hikes and the inflation outlook.

In the UK, the Bank of England (BoE) is expected to maintain a hawkish stance to tackle stubborn inflation, which remains in double digits due to high food prices and labor shortages. The UK Finance Minister, Jeremy Hunt, has promised to reduce the tax burden on households, which could further stimulate retail demand. However, this may undermine Prime Minister Rishi Sunak’s commitment to halve inflation pressures by the end of 2023.

Recent data from the UK Office for National Statistics (ONS) reveals that 18% of UK firms are planning to pass on the impact of higher input prices and employment costs to end-consumers, indicating ongoing inflationary pressures.

From a technical perspective, the GBP/USD pair has experienced a sharp decline after breaking the upward trendline from April 03, indicating the strength of US Dollar bulls. The pair currently faces potential support at the April 10 low of 1.2344. The 50-period Exponential Moving Average (EMA) at 1.2486 acts as a resistance level for Pound Sterling bulls. The Relative Strength Index (RSI) (14) has rebounded within the 40.00-60.00 range, suggesting a loss of momentum for US Dollar bulls.

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ABOUT THE AUTHOR See More

Arslan Butt

Index & Commodity Analyst

Arslan Butt serves as the Lead Commodities and Indices Analyst, bringing a wealth of expertise to the field. With an MBA in Behavioral Finance and active progress towards a Ph.D., Arslan possesses a deep understanding of market dynamics. His professional journey includes a significant role as a senior analyst at a leading brokerage firm, complementing his extensive experience as a market analyst and day trader. Adept in educating others, Arslan has a commendable track record as an instructor and public speaker. His incisive analyses, particularly within the realms of cryptocurrency and forex markets, are showcased across esteemed financial publications such as ForexCrunch, InsideBitcoins, and EconomyWatch, solidifying his reputation in the financial community.