GBP/USD edges higher for the second straight day, though lacks any follow-through buying.
The risk-on impulse prompts some follow-through USD profit-taking and remains supportive.The GBP/USD pair retreats a few pips from a multi-day peak, around the 1.1600 mark touched earlier this Tuesday and for now, seems to have stalled its bounce from the lowest level since March 2020. The pair, however, holds in the positive territory for the second straight day and is currently placed around the 1.1565 region, still up over 0.40% for the day.
Speculation over the incoming UK Prime Minister Liz Truss’s energy relief plans offers a much-needed respite to the British pound. This, along with rising bets for more aggressive interest rate hikes by the Bank of England and a modest US dollar weakness, continues to act as a tailwind for the GBP/USD pair. In fact, the BoE policymaker Catherine Mann said on Monday that the central bank should be prepared to raise interest rates rapidly to bring down inflation. The markets were quick to react and are now pricing in an 85% chance that the BoE will hike rates by 75 bps on September 15.
The USD, on the other hand, retreats further from a two-decade high touched the previous day and offers additional support to the GBP/USD pair. The risk-on impulse – as depicted by a generally positive tone around the equity markets – is seen as the only factor undermining the safe-haven greenback. That said, the prospects for more sharp interest rate hikes by the Federal Reserve, along with a fresh leg up in the US Treasury bond yields, help limit deeper losses for the buck. Apart from this, the UK’s bleak economic outlook further contributes to capping any meaningful upside for the GBP/USD pair.
On the economic data front, the UK Constructive PMI unexpectedly rose from 48.9 to 49.2 in August, though remained in the contraction territory. This, however, did little to influence sterling or provide any impetus to the GBP/USD pair. Hence, it will be prudent to wait for strong follow-through buying before confirming that spot prices have formed a near-term bottom and positioning for any further gains. Traders now look forward to the US ISM Services PMI for some impetus later during the early North American session.
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