GBP/USD refreshes weekly high above 1.2650 as BoE prepares for a fresh rate hike

GBP/USD has printed a fresh weekly high at 1.2653 in the early European session. The Cable has shown a stellar rally and is expected to extend its upside as the Bank of England (BoE) is preparing for a fresh interest rate hike this week. Thursday’s Bank of England (BoE) interest rate policy will be keenly watched by the market participants as the United Kingdom’s inflation is not showing signs of deceleration while the central bank has already tightened its monetary policy significantly.

S&P500 futures have generated some losses in the Asian session amid uncertainty over US debt ceiling issues. The overall market mood is quite cheerful, however, a cautionary approach is advisable ahead of the United States Consumer Price Index (CPI) data, which will release on Wednesday.

The US Dollar Index (DXY) is struggling to find any support and has refreshed its day’s low near 101.12. The further downside in the USD Index looks promising as any further delay in the raising of the US debt ceiling would impact the long-term outlook of the United States economy dramatically. Steady US labor market performance for April month has receded chances of more rate hikes from the Federal Reserve (Fed). This has improved the demand for US government bonds. The 10-year US Treasury yields have further dropped below 3.43%.

US Employment cements neutral Federal Reserve policy expectations

On Friday, the USD Index was heavily volatile amid the release of the US Nonfarm Payrolls (NFP) puzzle.  A stellar recovery was recorded in the USD Index after the upbeat US Employment report but later it surrendered gains knowing that the report was contaminated. March’s payroll additions were downwardly revised to 165K from the disclosed figure of 263K, which indicated that fresh additions were mere 2% higher than the former figure. The Unemployment Rate dropped to 3.4% from the consensus of 3.5%. A mild rise in the number of fresh talent is insufficient to force the Federal Reserve to reconsider its neutral rate guidance.

In addition to that, monthly Average Hourly Earnings accelerated at a pace of 0.5% while the street was anticipating a pace of 0.3%. Going forward, robust earnings could propel US inflationary pressures as households would be equipped with higher funds for disposal. More demand for core goods could lead to a rise in Producer’s Price Index (PPI) and henceforth fuel overall inflationary pressures.

US President to meet Speaker Kevin McCarthy over looming debt ceiling crisis

To address the looming US debt ceiling crisis after US Treasury warned that any delay in raising the debt ceiling could have severe damage to the sovereignty of the US economy. Millions of individuals will lose their jobs and overall output will get reduced sharply as US Treasury is out of funds and would fail in making obligated payments.

As the US Treasury has delivered a deadline of June 01 when it will fail in making payments, US President Joe Biden has invited congressional leaders to the table on Tuesday for negotiations after a prior meeting in February. It would be worth watching a decline in the President’s spending initiatives against the raising of the US debt ceiling.

Bank of England looks set for one more interest rate hike

UK’s double-digit sticky inflation has been a nightmare for the Bank of England policymakers. This would be the 12^th consecutive monetary policy meeting when Bank of England Governor Andrew Bailey will raise interest rates to continue to weigh on stubborn inflation. UK’s food inflation is historically high, labor shortages are consistently rising, and service providers are looking to pass on the impact of higher wages to end consumers. The entire gamut is expected to mount tensions for Bank of England policymakers ahead.

The Bank of England has already paused interest rates heavily and it is highly expected that the pace of the interest rate hike would be 25 basis points (bps), which will push interest rates to 4.50%.

GBP/USD technical outlook

GBP/USD is enjoying a rally after a breakout of the Rising Channel chart pattern formed on a two-hour scale. An upside break in the Cable is indicting sheer momentum in the Pound Sterling. The 20-period Exponential Moving Average (EMA) at 1.2620 is providing cushion to the Pound Sterling consistently.

Meanwhile, the Relative Strength Index (RSI) (14) is oscillating in the bullish range of 60.00-80.00, conveying further upside.