Ella 
GBP/USD edged lower in Asia on Thursday and extended overnight pullback from pressure in the 1.2765 area, a multi-day high. Its decline was entirely driven by dollar bullish sentiment, but spot prices managed to hold above the 1.2700 mark as bets on further BoE rate hikes rose.
The U.S. dollar index , which tracks the value of the greenback against a basket of currencies, climbed to its highest level since June 12 and was supported by the Fed’s hawkish outlook. Indeed, minutes of the Fed’s July 25-26 meeting, released on Wednesday, showed policymakers were divided on the need for further rate hikes, but continued to prioritize fighting inflation. In addition, strong U.S. macro data points to an extremely resilient economy, opening the door to another 25 basis points in interest rates this year.
The outlook pushed benchmark 10-year U.S. Treasury yields to their highest level since 2008 and boosted the dollar. In addition, overall weakness in equities has been another factor boosting the greenback’s safe-haven status and putting some pressure on GBP/USD. The headwinds from a sharp rise in borrowing costs fueled recession fears and weighed on investor sentiment amid concerns over deteriorating economic conditions in China.
But GBP/USD’s downside appears to be capped, at least for the time being, while expectations for another Bank of England rate hike in September have risen, adding to long-term inflation concerns. This, combined with an upbeat UK GDP report this week and a slightly higher-than-expected UK inflation rate on Wednesday, should keep the BoE on track for rate hikes.
The above-mentioned mixed fundamentals make it cautious to wait for strong follow-through selling before confirming that the recovery of the pound from the 100-day SMA in the 1.2615 area (the lowest level since June hit last week) is over. Market participants are now focused on U.S. economic data, including last week’s initial jobless claims and the Philadelphia Fed’s manufacturing index. Together with U.S. Treasury yields, it will affect the dollar and drive GBP/USD.
