GBP/USD gathers strength for more upside above 1.2450 as Fed to pause policy-tightening spell

• GBP/USD is making efforts for delivering extending upside as the USD Index loses strength.
• Federal Reserve Powell cited that tight credit conditions by the US banks are providing room to hold interest rates steady.
• Bank of England has already conveyed that they underestimated the strength and persistence in inflation.
• GBP/USD delivered a perpendicular fall after a breakdown of the upward-sloping trendline plotted from 1.2275.

GBP/USD is oscillating above 1.2450 after a recovery move and is looking to extend its rally further as the Federal Reserve (Fed) is considering a pause in the policy-tightening spell amid tight credit conditions by the United States regional banks. The US Dollar Index (DXY) is hovering near its day’s low around 103.00 as fears of a default by the US Treasury are escalating.

S&P500 futures have recovered decent losses added in early Asia, however, a cautious approach is still in season. US equities settled negative on Friday after US President Joe Biden denied approving partisan terms offered by House of Representatives Kevin McCarthy against delivering consent for a raise in the US debt-ceiling.

The USD Index is expected to remain on the tenterhooks as any further delay in raising the US borrowing cap limit would push the US economy further toward recession. The demand for US government bonds has rebounded marginally as investors believe that US President Joe Biden has the option of exercising his 14^th amendment right in which no approval is required from Republicans for raising the US borrowing cap.

14^th Amendment right – an untested law

US President Joe Biden called the bipartisan offer from House of Speaker Joseph McCarthy ‘unacceptable’. Republican leaders demanded a wide wrath of 8% spending cuts against approval of a raise in US borrowing cap. However, US President Joe Biden is ready to do an average cut of 22% in education and some law enforcement programs. Also, US Biden called that Republicans want to prevent them from winning re-election in 2024.

Meanwhile, investors are still less worried that US President Joe Biden could exercise his 14th amendment right, in case Republicans hold their current partisan terms, to save the United States economy from default as it could spike interest rates and bring chaos in financial markets. However, the White House is not sure that they have sufficient time to exercise the un-tested way out.

Federal Reserve to capitalize on US banks’ tight credit conditions

The catalyst that is supporting Asian markets from an intense sell-off is the dovish statement from Federal Reserve (Fed) chair Jerome Powell on interest rate guidance delivered on Friday. Federal Reserve Powell cited that tight credit conditions by the US regional banks are providing room for the central bank to hold interest rates steady for a period of time in order to assess the impact of the current interest rate policy.

Adding to that, Minneapolis Federal Reserve President Neel Kashkari cited this weekend that he is interested in supporting Federal Reserve for holding interest rates steady in June monetary policy meeting as the central bank needs time in assessing the effects of past rate hikes and the inflation outlook, as reported by Wall Street Journal (WSJ).

Bank of England to remain hawkish to tame stubborn UK Inflation

Out of the G7 economies, the United Kingdom economy seems to be the laggard that has failed in bringing down inflation. The UK inflation is still in the double-digit figure led by historic high food inflation and labor shortage due to early retirement. Bank of England Governor Andrew Bailey has already conveyed that they underestimated the strength and persistence of inflation.

Last week, UK Finance Minister Jeremy Hunt promised a decline in tax burden from households, which would fuel retail demand further. This would also undermine the promise by UK Prime Minister Rishi Sunak of halving the inflation pressures by the end of CY2023.

On Thursday, the UK Office for National Statistics (ONS) reported that 18% of UK firms are looking to pass on the impact of higher input prices and costly employment to end-consumers vs. 23% of firms recorded in the last survey.

GBP/USD technical outlook

GBP/USD delivered a perpendicular fall after a breakdown of the upward-sloping trendline plotted from April 03 low at 1.2275 on a four-hour scale. The Cable is consistently making lower highs, indicating the strength of the US Dollar bulls. Potential support is placed from April 10 low at 1.2344.

The 50-period Exponential Moving Average (EMA) at 1.2486 is acting as a barricade for the Pound Sterling bulls.

Meanwhile, the Relative Strength Index (RSI) (14) has rebounded into the 40.00-60.00 range, indicating that the US Dollar bulls are losing momentum.