December 5, 2022 3:25 AM ET
By:AnalysisWatch
The GBP/USD starts the new week on a positive note, reaching the highest level since September 16, although the momentum fades before the mid-1.2300s. The pair gives back some of its intraday gains and falls back below the 1.2300 level at the start of European trading.
A combination of factors has helped the US dollar recover slightly from the five-month low it hit on Monday, which in turn acts as a headwind for the GBP/USD pair. Despite the easing of COVID-19 restrictions in China, concerns about a deeper global economic downturn continue to weigh on investor sentiment. This is reflected in a calmer tone in the equity markets, which, along with a rise in U.S. Treasury bond yields, is providing some support to the safe-haven buck.
The positive monthly U.S. labor market report (NFP) released on Friday and a positive surprise in wages point to a further increase in inflationary pressures. This confirms Federal Reserve Chairman Jerome Powell's forecast that the maximum interest rate will be higher than expected and pushes U.S. Treasury bond yields higher. However, solidifying expectations that the Fed will slow the pace of its monetary tightening may slow the further rise of the USD. In fact, markets expect a 50 basis point rate hike in December.
On the other hand, the British pound is weakened by the gloomy outlook for the UK economy. Apart from that, the dovish comments made by Bank of England (BoE) Chief Economist Huw Pill last week, suggesting that inflation may start to fall, may discourage bullish traders from making aggressive bets on the GBP/USD pair. Meanwhile, the mixed fundamental environment suggests that the major is more likely to consolidate its recent strong gains ahead of the final services PMIs from the UK and the US.