GBP/USD bears back in as US Dollar resurges from US session lows
- GBP/USD is back under pressure as the US Dollar resurges.
- Despite softer US data, the greenback is correcting the sell-off on Tuesday.
- GBP got only some temporary relief from the ”Windsor Framework” deal.
GBP/USD was making good ground on Tuesday following on from the rally that started on Monday in an agreement that was made and hailing the end of a tense dispute between Britain and the EU over Northern Ireland. New trade rules were put together that could resolve import issues and border checks in Northern Ireland and that could help to ensure Northern Ireland was not somehow treated separately from the rest of the United Kingdom. The deal has been dubbed the “Windsor Framework” — a change to the original Northern Ireland Protocol — attempts to solve those issues.
The Pound Sterling climbed to a high of 1.2143 from 1.1925 at the start of this week after the UK’s Prime Minister Rishi Sunak’s announcement. Also, the cost of insuring British government debt against default dropped to its lowest in three weeks, close to January’s five-month lows, reflecting greater investor confidence. But analysts said that any positives for the pound from the newly minted post-Brexit rules would likely not last, given the economic outlook.
”We remain unconvinced about the UK’s current fundamental backdrop,” analysts at Rabobank said. ”In the absence of a deal on the Northern Ireland protocol, we expect upside flurries in GBP to be short-lived.”
Additionally, the analysts said, ”Comments around the risk of overtightening by BoE Chief economist Pill supported the notion that the Bank could be close to a pause in policy.” Markets expect UK rates to peak around 4.8% by the end of the year, up from 4.0% now. At the beginning of the month, the expected peak was just 4.0%.
US Dollar bounces back to life
Meanwhile, the US Dollar has been dominating markets in the US and choppy trading on Wall Street. A round of mainly weak economic data knocked it off its perch but it soon turned over and was back on track for the best monthly gain since September. The Federal Reserve sentiment is keeping the greenback in the hands of the bulls as marked price in the notion that the central bank will have to raise interest rates more than initially expected.
Despite some cooler data over the last couple of key releases, due to the prior slew of inflationary outcomes, the US rate futures have priced in a peak fed funds rate of 5.4% hitting in September. The market has all but priced out rate cuts this year. Consequently, the US Dollar index, DXY, which measures the currency against a basket of major currencies, was higher by 0.18% in late morning trade on Wall Street and set for a February gain of over 2.5%, its first monthly increase since September.
As for the data that was released on Tuesday, showing signs of cracks in the economy, US single-family home prices increased at their slowest pace in December since the summer of 2020 while the US Chicago PMI fell to 43.6 in February, weaker than expected, after sliding to 44.3 in January. To round it off, Consumer Confidence also lost its footing this month to 102.9, down from a revised 106 reading last month.