GBP/USD Pair Recovers as US Debt Ceiling Approval Eases Dollar Index Pressure

Posted Monday, May 29, 2023 by
Arslan Butt • 2 min read

The GBP/USD pair has made a recovery attempt after trading sideways below 1.2350 during the Asian session. The recent strength in the British pound, also known as Cable, can be attributed to the decline in the US Dollar Index (DXY) following the approval of a raise in the US debt ceiling.

Led by House of Representatives Kevin McCarthy, Republicans have approved a two-year increase in the US borrowing cap to $31.4 trillion. The White House agreed to cut spending for the budget, but remained firm on maintaining health coverage and addressing poverty.

Despite receding fears of a US federal default on obligated payments, S&P500 futures have trimmed some early Asia gains.

The approval of a higher US debt ceiling has eased concerns of a spike in interest rates and potential default, putting significant pressure on the US Dollar Index (DXY) and US equities. Furthermore, an increase in the debt ceiling may attract credit rating agencies, leading to potential downgrades and impacting the long-term credibility of the US economy.

Investors will closely watch the release of the United States Automatic Data Processing (ADP) Employment data (May) on Thursday, which is expected to show a decline in payroll numbers compared to the previous addition.

Meanwhile, the Pound Sterling has shown signs of recovery as the Bank of England (BoE) is expected to further raise interest rates due to persistent inflationary pressures in the United Kingdom. BoE Governor Andrew Bailey aims to halve inflation by the end of the year, in line with UK PM Rishi Sunak’s commitment.

Barclays predicts that the BoE will extend the tightening cycle beyond the June meeting and anticipates an additional 25bps hike in August, with the terminal bank rate reaching 5%.

In terms of technical analysis, the GBP/USD pair is currently attempting to breach the 1.2345 level, influenced by positive stochastic momentum. It is crucial for the price to remain below this level to maintain the correctional bearish trend, targeting 1.2240 as the next key support level. However, if the 1.2345 level is confirmed to be breached, it could halt the bearish wave and prompt the price to resume the main bullish trend.