GBP/USD drops below 1.2200 as investors see Fed’s interest rate peak at 5.75%

The GBP/USD pair surrendered the psychological support of 1.2200 in the early European session. The Cable witnessed selling pressure after failing to extend recovery above 1.2220 displayed in Tokyo. The major is expected to remain in the grip of bears amid a risk-off market mood.

An improvement in safe-haven’s appeal has supported the US Dollar index (DXY) to extend gains to near Monday’s high of around 105.40. Also, the 10-year US Treasury yields have scrolled above 3.59% and are expected to advance further amid rising expectations of a higher interest rate peak by the Federal Reserve (Fed). Meanwhile, S&P500 futures are displaying a lackluster performance showing an inability in recovering losses reported on Monday.

Positive synergy from US Nonfarm Payrolls and US ISM Services PMI data have cemented a higher interest rate peak by the Federal Reserve (Fed). Fed policymakers have already promised for a slowdown in the interest rate hike to reduce financial risks. Therefore, a deceleration in the interest rate hike pace seems solid but a higher interest rate peak cannot be ruled out as the current inflation rate is far from the targeted rate of 2%.

Chicago Fed President Charles Evans said on Friday, "We are probably going to have a slightly higher peak to Fed policy rate even as we slow pace of rate hikes," as reported by Reuters.

As per the CME Fedwatch tool, investors are expecting an interest rate peak around 5.50-5.75% by the end of CY2023.

On the United Kingdom front, upbeat consumer spending data failed to keep reins in the Pound Sterling. Like-For-Like Retail Sales reported by the British Retail Consortium (BRC) escalated to 4.1% from the prior release of 1.2% in November on an annual basis. This might create more troubles for the Bank of England (BOE) as upbeat retail sales cement higher inflation expectations in the near term.