GBP/USD rallies on soft US Dollar, eyes on 1.2500

• GBP/USD pops higher as the US Dollar comes under pressure. 
• US debt ceiling risks and Treasury yields falling are weighing on the greenback. 

GBP/USD is 0.29% higher on the day after rallying from a low of 1.2410 and reaching a high of 1.2478. The US Dollar has been sold off as US yields sink at the start of the week. 

The US Dollar, as measured by the DXY index, has fallen from a high of 101.909 and has reached a low of 101.369 in recent trade. US Treasury yields are down, with the 2-year losing 1.12% and the 10-year down 1.7%. Further in, the yield of the 1-month Treasury, which started the month near 4.7%, fell to 3.30% as investors appeared to grow increasingly concerned about a potential standoff over the US debt ceiling. 

The House of Representatives is expected to vote on a Republican-led debt and spending bill this week. Additionally, until rate cuts this year are finally priced out, the US Dollar is likely to remain vulnerable.  Also, a closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at -62.9 basis points.

All eyes on the US data ahead of the FOMC

Meanwhile, we have entered the quiet period for the Fed ahead of the May 2-3 Federal Open Market Commmittee meeting and all eyes are on the data between now and then. ´´Recent resilience in the US economy helped push US Treasury yields higher and we look for that process to continue,´´ analysts at Brown Brothers Harriman explained. ´´If so, the dollar should continue to gain as well,´´ they said.

In the data at the start of the week, the Chicago Fed National Activity Index fell 0.19 in March, beating market expectations for a 0.20 decline. The April reading of the Dallas Fed Manufacturing Index, however, was -23.4, way worse than the -12.0 economists were predicting, down from -15.7 in March. 

´´The continued resilience in the economy is noteworthy and suggests the Fed still has a lot more work to do in getting to the desired sub-trend growth,´´ analysts at Brown Brothers Harriman said.

Between now and next Wednesday’s Fed decision, we will have the first quarter Gross Domestic Product this week and then Personal Consumption Expenditure. The following week, ISM manufacturing PMI, then next Tuesday brings JOLTS data and next Wednesday brings ADP private sector jobs. The Nonfarm Payrolls will come after the Fed. 

´´ To us, a hike next week is a done deal,´´ the analysts at BBH said.  ´´There are about 15% odds of another 25 bp hike in June. At this point, a pause in June might just be the most likely outcome but it really will depend on how all that data come in.  After all that, one cut is still priced in by year-end vs. two at the start of last week.  In that regard, Powell has said that Fed officials “just don’t see” any rate cuts this year.  We concur.´´

GBP/SD technical analysis

GBP/USD bulls are in the market, eyeing a run to test 1.2500 within the breakout of the inverse head and shoulders pattern on the 4-hour chart.