GBP/USD Dips as USD Strengthens | Fundamental Analysis

17 May 2023

In the early European session, GBP/USD is declining towards 1.2400. The British pound is under pressure due to increased demand for the US Dollar, as investors assess US debt ceiling discussions alongside mid-tier US housing data.

The US Dollar (USD) has gained momentum and reached a five-week high following hawkish comments from Cleveland Fed President Loretta Mester. Mester's remarks signaled that interest rates are not restrictive enough and that the central bank is not yet inclined to hold rates steady. This led to a significant rise in US Treasury bond yields overnight. Additionally, a general decline in equity markets, reflecting a risk-off sentiment, has further boosted the Greenback's safe-haven appeal against the British pound.

The release of weaker Chinese macro data on Tuesday has also contributed to concerns about a fragile post-COVID recovery in the world's second-largest economy, fueling recession fears. Combined with ongoing uncertainties surrounding the federal government's borrowing limit, this has dampened investors' appetite for riskier assets.

Despite mixed US Retail Sales figures, which had limited impact on the market, USD bulls remain unfazed. Market expectations are still aligned with the Federal Reserve's hawkish stance, anticipating higher interest rates for an extended period.