• GBP/USD reaches a four-week high at 1.2590, but dips slightly after a weaker-than-expected Canadian jobs report, strengthening the case for the Federal Reserve to maintain its current monetary policy.
• Positive market sentiment and anticipated divergence between the US Federal Reserve (Fed) and the Bank of England (BoE) support the Pound Sterling (GBP) against the US Dollar (USD).
• The upcoming monetary policy decisions by the Fed and the BoE, as well as key economic data releases, will provide further insights into the direction of GBP/USD exchange rate.

The GBP/USD pair reached a new four-week high at 1.2590 before experiencing a slight dip to the 1.2570s range. The dip was influenced by a weaker-than-expected Canadian jobs report, further supporting the likelihood of the Federal Reserve maintaining its current monetary policy stance. As of now, GBP/USD is trading at 1.2576, representing a 0.14% increase and is set to end the week with gains exceeding 1%.

Favourable market sentiment and anticipated central bank actions support GBP

The current market sentiment is positive, leading to a weaker US Dollar (USD) and putting pressure on safe-haven currencies. This situation, coupled with the divergence in monetary policies between the US Federal Reserve (Fed) and the Bank of England (BoE), benefits the Pound Sterling (GBP). The GBP/USD pair has rebounded from its weekly lows of 1.2368. In the upcoming week, the Fed Chair Jerome Powell and fellow policymakers will announce their decision on monetary policy. It is expected that the Fed will maintain interest rates at 5.00%-5.25%, the same as the previous meeting in May, as they assess the impact of the 500 basis points (bps) tightening since March 2022. However, recent hawkish moves by other major central banks that have paused their tightening cycles have opened the possibility of a rate hike.

The International Monetary Fund (IMF) has called on the Fed and other central banks worldwide to remain committed to monetary policy tightening as they strive to control inflation.

Additionally, the UK has managed to avoid the recession projected by the Bank of England (BoE). However, the country is still grappling with persistently high inflation, peaking at 11.1% in October of the previous year and currently standing at 8.7%. This inflationary pressure has prompted the BoE to consider raising interest rates above their comfort levels.

These factors support the GBP/USD pair, which is expected to test the 1.2600 level. Currently, the swaps market is pricing in a potential rate increase by the BoE, projecting rates in the UK to rise to 5.50%, which is 100 basis points higher than the current levels.

Upcoming events to watch

In the following week, the UK economic calendar will feature important data on labor market conditions and Gross Domestic Product (GDP) figures, serving as the highlights of the week. Meanwhile, in the US, the Federal Reserve’s monetary policy meeting, Consumer Price Index (CPI), and Retail Sales data will provide updates on the state of the US economy.