GBP/USD on the Rise: US Dollar Retreats, 1.2760 Barrier in Sight

GBP/USD charges towards the 1.2760 hurdle as the US Dollar retreats, signaling a bullish recovery. The Pound Sterling is riding the wave of a weakening US Dollar amidst sluggish market conditions and mixed catalysts. After slipping below 1.2700 on Wednesday, GBP/USD rebounded strongly later in the day, erasing its daily losses. As the new week begins, the pair remains steady around 1.2750, with investors eagerly awaiting the Bank of England's (BoE) announcement on monetary policy decisions.

Anticipations are high for the BoE to implement a 25 basis points (bps) increase in its policy rate, pushing it to 4.75%. While there won't be a post-meeting press conference, market participants will scrutinize the policy statement for any fresh insights into the future of the policy outlook.

While it is unlikely, a surprise 50 bps rate hike would be perceived as a significantly hawkish move, giving a substantial boost to GBP/USD. In May, two policymakers voted to maintain the policy rate unchanged. If these policymakers adopt a more hawkish stance and the BoE raises the rate unanimously, Pound Sterling could exhibit resilience against its counterparts. In such a scenario, remarks concerning inflation developments may have an impact on the currency's valuation.

The UK has witnessed uncomfortably high levels of inflation and wage inflation since the last policy meeting, rendering the BoE's earlier forecasts of a sharp drop in inflation from April inaccurate, to say the least. Recognizing the persistent high inflation and the necessity for further tightening could generate demand for Pound Sterling.

Conversely, if the BoE downplays the latest inflation readings and refrains from committing to additional rate hikes, GBP/USD may experience a downturn.

It is worth noting that GBP/USD concluded the previous three weeks in positive territory, registering a nearly 4% gain during that period. The pair's rally was fueled by robust wage inflation data from the UK and the overall weakness of the US Dollar, following the Federal Reserve's decision to pause rate hikes. Market participants have already priced in a hawkish outcome from the BoE, but they will require more than just a 25 bps hike to commit to a further upward movement in GBP/USD. From a technical standpoint, the price is still within a bullish channel, with a recent retracement to the 38.2% Fibonacci level. This sets the stage for a potential new bullish impulse, allowing the pair to continue its upward trajectory.