GBPUSD opens gap-down near 1.1300 despite Fed favors a less-hawkish guidance

• GBPUSD has initiated Monday’s movement with a gap-down approach despite cheerful market mood.
• Less room for more Fed’s bigger rate hike has weakened the DXY’s appeal.
• Investors are awaiting more developments on tightening fiscal policy measures by UK’s novel leadership.

The GBPUSD pair has initiated the week on a gap-down note near the round-level support of 1.1300 in the early Tokyo session. This could be the result of long liquidation after a bullish Friday as the market mood is extremely cheerful on expectations of a slowdown in the pace of rate hikes by the Federal Reserve (Fed) ahead.

Solid improvement in investors’ risk appetite has capped the US dollar index (DXY)’s upside. The mighty DXY is oscillating below the critical hurdle of 111.00. However, the returns on US government bonds are still solid despite a decline in volatility. The 10-year US Treasury yields are hovering around 4.16%.

Chicago Fed President Charles L. Evans cited on Friday that the time is ripe for smaller rate hikes by the Fed to avoid tightening monetary policy more than needed and slow the pace further once risks become more “two-sided”, as reported by Reuters.

Last week, the Fed hiked interest rates by 75 bps consecutively for the fourth time to 3.75-4.00% to scale down mounting price pressures. The headline Consumer Price Index (CPI) has already depicted signs of exhaustion, however, the condition of making a peak in core inflation still seems far from over.

The deviation between current borrowing rates and the desired terminal rate is one big rate hike now, therefore less room for more rate hikes could compel Fed chair Jerome Powell to adopt the ‘baby steps’ approach ahead.

On the UK front, investors are awaiting more developments on tightening fiscal policy measures by novel leadership in Britain led by UK Prime Minister Rishi Sunak and Chancellor Jeremy Hunt that will aid in an enlarged debt crisis.

Spending cuts and tax appreciation have been announced by the UK administration to trim overall debt and inflation from the economy. The financial statement to be delivered on November 17 will provide clarity over the scale of tightening fiscal measures and may weigh on households’ earnings further in already higher payout times due to double-digit inflation and subdued earnings.