GBP/USD Rate: Three Reasons Why the Rally is on Hold

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There are "three reasons not to sell the USD" says a new analysis from Credit Agricole which suggests a peak in GBP/USD near 1.25 might have been reached, for now at least.

The French headquartered global investment bank says although the U.S. Dollar has been weak it is unlikely to slide into a more protracted downtrend that would prompt the Pound to Dollar exchange rate (GBP/USD) to new highs.

Analysts cite three reasons for expecting USD resilience:

"The first is a less dovish than expected policy pivot by the Fed next week, when we expect the bank to hike for the last time in the current tightening cycle but also push back against the pricing of rate cuts in the market," says Valentin Marinov, who heads FX research at Credit Agricole.

The market expects the Fed to raise interest rates by a further 25 basis points on May 03, but the messaging could signal this is the final hike.

The Fed would nevertheless be keen to impress on markets that it would be premature to cut interest rates, which could offer some support to the Dollar.

Current money market pricing shows investors are looking for rate cuts to start in the second half of 2023 as the Fed reacts to a sharp slowdown in the economy.

In fact, the Fed is expected to cut more than any other major central bank in 2023, a development that has spurred a decline in the Dollar and helped GBP/USD to record a 3.0% advance for 2023.

But Credit Agricole expects incoming U.S. data to confirm inflation remains uncomfortably "sticky", warranting the Fed to keep "rates elevated for longer and weigh on risk sentiment, in a boost to the safe-haven USD."

A final potential source of support for the Dollar will be the perennial question of the U.S. debt ceiling which must be lifted once more.

Credit Agricole joins other institutions in expecting the matter to increasingly dominate FX market price action and could further give the USD a boost vs risk-correlated currencies.

The U.S. Treasury reached its debt limit on January 19, 2023, leaving it reliant on incoming tax receipts and other extraordinary measures to remain funded, though some analysts estimate these resources will run out as soon as sometime in June without action from Congress and the White House.

"Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history," the U.S. Treasury explains.

"That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession," it adds.