GBP/USD declined from early-week gains to around 1.3520 during the Asian session on Tuesday. The pullback reflects anticipation about the Federal Reserve's policy path amid persistent US inflation and uncertainty over the timing of the first rate cut after extended tight policy. Recent US dollar strength partly reflects trader confidence that the Fed may slow rate cuts despite market odds above 89% for a 25-basis-point September cut. Key US data this week — ISM Manufacturing PMI, ADP employment, and Non-Farm Payrolls — will test the Fed's willingness to cut. Weaker labor data could weaken the dollar and support sterling, while the Bank of England signals a bias toward keeping rates higher for longer.
In my view, this pullback does not merely reflect temporary strength in the US dollar but also illustrates a sense of anticipation across global markets regarding the Federal Reserve's monetary policy path. I believe the pair's current movement cannot be viewed in isolation from the broader context, which is a mix of persistent inflationary pressures in the United States and uncertainty over the actual timing of the first rate cut after months of tight monetary policy.
The recent appreciation in the US dollar reflects renewed confidence among some traders that the Federal Reserve may slow the pace of rate cuts, despite current expectations indicating a probability above 89% for a 25-basis-point cut at the upcoming September meeting. In my opinion, the market may be overestimating the dollar's short-term strength, since such high expectations mean that any negative surprise in US economic data could quickly translate into downward pressure on the greenback, thereby allowing sterling to regain momentum.
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