Home Forex GBP/USD edges higher to 1.2710 on prevailing risk sentiment

GBP/USD edges higher to 1.2710 on prevailing risk sentiment

by SuperiorInvest


  • GBP/USD moves higher on subdued US dollar amid risk-on sentiment.
  • Softer UK retail sales data may have contributed to the British pound’s losses.
  • The US dollar could draw support from its safe haven status amid escalating geopolitical threats in the Middle East.

GBP/USD it is retracing its recent losses recorded on Friday and is trading higher near 1.2720 during Monday’s Asian session. The pound sterling (GBP) is making advances against the US dollar (USD), a move potentially associated with prevailing market risk. However, the GBP/USD pair struggled following the release of lackluster December retail sales data from the United Kingdom (UK) on Friday.

The Office for National Statistics (ONS) released monthly retail sales figures for December, which revealed a sharp fall of 3.2% from the previous figure of 1.4%. That beat expectations for a 0.5% decline. On a year-on-year basis, the data indicated a decline of 2.4%, in contrast to an expected increase of 1.1%.

A sharp drop in consumer spending poses a potential hurdle for the Bank of England (BoE) to maintain tight policy without risking a downturn in the economy. Bank of England (BoE) policymakers will watch additional data to assess whether core inflation is on track to return to the 2.0% target in a timely and sustainable manner.

The US dollar index (DXY) extends losses for a second straight session on weaker US 10-year yields, which can be attributed to market expectations that the US central bank (Fed) will reduce policy rates more than any other major central bank in the world in 2024. The DXY is trading around 103.10, with 10-year US Treasury yields lower at 4.11%. While the two-year yield is at 4.39% at the time of writing.

However, the US dollar may find support given its safe haven status amid concerns over maritime trade in the Red Sea. Both the US and the UK are trying to escalate their campaign without provoking a wider conflict with Iran, which would divert more ships from the Suez Canal and the Red Sea. Shipping vessels are carefully evaluating the risks associated with sailing in the Red Sea as rising insurance costs become a significant factor.

This geopolitical threat has the potential to intensify risk aversion sentiments forcing traders to seek refuge in safe-haven assets, which could boost demand for American dollarwhich in turn puts downward pressure on the GBP/USD pair.

On Friday, San Francisco Fed President Mary Daly shared her view, saying the central bank still has a long way to go to bring inflation back to its 2.0% target. She emphasized that it is premature to consider interest rate cuts as an immediate measure at this time.

Meantime, Atlanta Fed President Raphael Bostic reaffirmed his stance on rate cut expectations just before the Fed entered a “blackout” period ahead of the upcoming rates meeting scheduled for January 31. Bostic reiterated his openness to adjusting his outlook on the timing of rate cuts, stressing that the Fed continues to rely on data to guide its decision-making.

In the absence of highly impressive data from the United States (US) and the United Kingdom (UK), traders will be watching the US Richmond Fed Manufacturing Index and UK Public Sector Net Borrowing on Tuesday.

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