GBP/USD remains above 1.2700 despite risk aversion mood, awaits BoE Bailey’s speech

• GBP/USD grapples to halt the losses despite improved risk aversion.
• US Dollar could extend its gains on improved US bond yields.
• British Pound could advance on the expectation of BoE’s hawkish interest rate trajectory.

GBP/USD is in focus as it hovers around 1.2710 during the Asian session on Wednesday. After a recent dip that interrupted a four-day winning streak, the Pound Sterling (GBP) found support against the US Dollar (USD). The improved market risk appetite, driven by comments from Federal Reserve (Fed) members speculating about potential rate cuts by the end of 2024, contributed to a weaker US Dollar. However, a sudden shift in sentiment towards risk aversion added pressure, impacting the GBP/USD pair.

The US Dollar Index (DXY) consolidates near 102.50 after recent gains, attempting to extend its profits on improved US Treasury yields. The 2-year and 10-year yields on US bond coupons stand at 4.36% and 4.02%, respectively, by the press time.

However, the risk-on sentiment triggered by the Federal Reserve’s (Fed) members’ remarks speculating interest rate cuts by the end of 2024 has exerted downward pressure on the US Dollar. Atlanta Fed President Raphael W. Bostic mentioned that inflation has declined more than initially anticipated and expressed the view of expecting two quarter-point cuts by the end of 2024.

Additionally, US Fed Governor Michelle W. Bowman expressed that the current policy stance appears sufficiently restrictive, but it might eventually become appropriate to lower the Fed’s policy rate if inflation falls closer to the 2% target.

The GBP/USD pair has displayed strength lately, largely influenced by monetary policy divergences between the Bank of England (BoE) and the US Federal Reserve (Fed). The BoE has maintained its stance on further rate hikes, even as indicators like inflation and wage growth show signs of easing. In contrast, expectations are building that the Fed may initiate an easing cycle as early as March.

DeAnne Julius, a former member of the Bank of England’s (BoE) monetary policy committee, has expressed a different view regarding interest rates. According to her, the Bank of England won’t be in a position to start cutting interest rates in 2024. Additionally, she mentioned that the escalating tensions in the Middle East could potentially lead to a new round of energy price increases, triggering a new inflation shock.

BoE’s Governor Andrew Bailey’s speech is due on Wednesday. Furthermore, UK Manufacturing Production data will be released on Friday, expecting to have registered a growth in November. On the US docket, December’s Consumer Price Index (CPI) data from the United States will be released on Thursday.