GBP/USD extends the rally above 1.2550, eyes on BoE rate decision

The GBP/USD pair trades in positive territory for the fifth consecutive day near 1.2560 during the Asian session on Tuesday. The weaker US Dollar (USD) provides some support to the major pair. The Bank of England (BoE) interest rate decision on Thursday will be in the spotlight, with no change in rate expected. 

Investors increased their bets that the US Federal Reserve will cut the interest rate this year after US employment data last week slowed more than expected in April. Fedspeak this week might offer some hints about future monetary policy. On Monday, Richmond Fed President Thomas Barkin said that the current interest rate level should cool the economy enough to bring down inflation to the 2% target, with the strength of the job market giving officials time to gain confidence that inflation will fall. 

Meanwhile, New York Fed President John Williams stated that while rate cuts would happen, monetary policy was currently in a very good place. Later in the day, Fed Bank of Minneapolis President Neel Kashkari is set to speak. The dovish tone of Fed officials might drag the Greenback lower and create a tailwind for the GBP/USD pair for the time being. According to LSEG's rate probability app, financial markets have priced in rate cuts worth 46 basis points (bps) from the Fed by the end of 2024, with the first cut expected in September or November. 

On the other hand, the BoE is expected to hold rates at 5.25% at its May meeting on Thursday. Traders will closely monitor about possible timescale for rate cuts and the BoE’s guidance on interest rates. Nonetheless, the dovish comments from the BoE Governor Andrew Bailey and Deputy Governor Dave Ramsden in April triggered speculation that the easing cycle of the BoE may be closer to the European Central Bank (ECB) than to the Fed. The BoE's Bailey noted that he is confident that headline inflation will return to the desired rate of 2% in April. The dovish stance of the UK central bank might weigh on the Pound Sterling and cap the downside of the pair.