GBP/USD Climbs Back Above 1.25300's As Fed Holds Rates Steady For Sixth Consecutive Time
Key Takeaways:
- GBP/USD cross gained positive traction for the second consecutive day on Thursday and moves back above 1.25300s
- For the sixth consecutive May meeting, the Fed kept the target range for the federal funds rate unchanged at 5.25% - 5.50%
- Upbeat UK S&P Global Manufacturing PMI data report and hawkish comments from Bank of England Chief Economist Huw Pill extend support to the Cable
GBP/USD cross-extended the corrective rebound from the vicinity of the 1.24661 level touched on Wednesday and gained positive traction for the second successive day on Thursday. The momentum has lifted spot prices back above 1.25300 during the second half of the Asian session. The shared currency looks to maintain its offered tone amid a weakening U.S. Dollar.
The USD Index, which measures the greenback's performance against a basket of currencies, fell further on Thursday in a choppy trading session, extending losses for the second consecutive day. A recovery in risk sentiment depicted by firmer stocks and lower long-dated Treasury yields weighed on the safe-haven buck as investors consolidated their positions ahead of tomorrow's crucial U.S. jobs numbers.
It is worth noting that Treasury yields fell on Wednesday as investors digested the Federal Reserve's move to reduce the speed of its quantitative tightening starting from June 1st and the central bank's chairman, Jerome Powell, ruling out a rate hike shortly, stating that he believes that the current policy is sufficiently restrictive to achieve the 2% inflation target.
The Treasury yield moves came despite the Federal Reserve keeping the target range for the federal funds rate unchanged at 5.25% - 5.50% during its May meeting for the sixth consecutive time. Wednesday's decision was widely expected as inflation remains stubborn in the U.S. Meanwhile, the U.S. labor market continues to be tight, indicating a stall in progress toward bringing inflation back down to its 2% target this year.
That said, further contributing to the weaker sentiment around the buck was the fresh round of disappointing U.S. macro data, which showed the number of job openings declined by 325,000 from the previous month to 8.488 million in March 2024, reaching the lowest level since February 2021 and missing the market consensus of 8.690 million. Additionally, the ISM Manufacturing PMI in the United States fell to 49.2 in April of 2024 from 50.3 in the earlier month, firmly below market expectations of a stall.
Shifting to the U.K. docket, an S&P Global report released on Wednesday showed the U.K. Manufacturing PMI was revised slightly higher to 49.1 in April 2024, up from a preliminary estimate of 48.7 but down from March's 20-month high of 50.3 and turned out to be a factor helping exert upward pressure on the GBP/USD cross.
Last week, hawkish comments from Bank of England Chief Economist Huw Pill supported the Cable and helped cap the downside for the major currency pair. While speaking at the London campus of the University of Chicago Booth School of Business, Huw said there are more significant risks associated with easing too early should inflation persist rather than easing too late should inflation abate. He further mentioned that he is erring on the side of caution when reducing the bank rate.
Despite this, news that the Bank Of England is moving close to a looser stance weighs on the Cable and might help cap the upside for the GBP/USD pair. Markets expect the U.K. central bank to start cutting rates as soon as the June or August meetings.
Going forward, investors look forward to the U.S. docket, which will feature the release of the U.S. Initial Jobless Claims Data Report (previous week). The main focus, however, remains on the release of the key U.S. Job numbers.
