GBP/USD stays solid above 1.2600 as USD Index prone to further downside, US NFP in spotlight

• GBP/USD is aiming to sustain its auction above 1.2600 as the Bank of England would hike interest rates further.
• Federal Reserve has confirmed that further policy action will be data-driven.
• Bank of England is expected to raise rates for the 12^th consecutive time to tame double-digit inflation.
• GBP/USD has delivered a confident breakout of the upward-sloping channel.

GBP/USD has confidently climbed above the round-level resistance of 1.2600 in the early European session. The Cable has refreshed its 11-month high at 1.2614 and might discover more gains as the US Dollar Index (DXY) is expected to display more downside amid multiple headwinds.

S&P500 futures have generated stellar gains in Asia as investors are shifting their focus on optimism influenced by Federal Reserve’s (Fed) neutral interest rate guidance. US equities were settling in the bearish territory consistently for the past three trading sessions amid renewed fears of a US banking crisis, potential fears of US debt ceiling concerns, and uncertainty over the Federal Reserve’s roadmap of bringing down stubborn inflation.

The USD Index has corrected sharply to near 101.15 and is expected to show some further downside to near the crucial support of 101.00 as a delay in the US debt ceiling raise could impact the long-term outlook of the United States economy. However, the US yields have got recovery after nosediving. The yields offered on 10-year US government bonds have rebounded above 3.38%.

US debt ceiling- A twin-edge sword for the US Dollar

Investors are worried that a delay in increasing the US debt ceiling by the White House would bring severe calamity for the US Dollar as millions of US individuals will lose their job and the Gross Domestic Product (GDP) will get squeezed. This will have a severe impact on the US Dollar. However, a timely approval of the US debt ceiling raise would also have a negative impact on the US Dollar as it would attract a downward revision of the long-term outlook for the US economy from credit rating agencies. An increment in the US debt ceiling would have a significant impact on the US Dollar, US yields, and equities but will improve appeal for the Gold as safe-haven.

US NFP- Last hope of recovery

As Federal Reserve chair Jerome Powell has already confirmed that further policy action will be on a data-driven approach, the release of the US labor market data would be the last hope of a recovery in the USD Index. A preliminary US NFP report (April) shows that the economy added 179K jobs in April, lower than former additions of 236K. The Unemployment Rate is seen unchanged at 3.5%. Apart from them, the major catalyst will be Average Hourly Earnings data. Monthly and annual Average Hourly Earnings may remain steady at 0.3% and 4.2% respectively.

US businesses passed impact of higher employment costs to end users

United Kingdom’s final S&P Global/CIPS Services PMI rose to 55.9 from 52.9 in March. Reuters reported that UK businesses are comfortably passing the impact of higher wages cost to end users. This will result in more burdens on households and the Bank of England (BoE) will be split into easing households’ burdens or curbing persistent inflation.

 Investors are keenly awaiting the interest rate decision by the Bank of England (BoE), which is scheduled for May 11, Thursday. Bank of England Governor Andrew Bailey is expected to raise interest rates further by 25 basis points (bps) to tame double-digit inflation. This would be the 12^th consecutive interest rate hike by the Bank of England from 2021.

GBP/USD technical outlook

GBP/USD has delivered a breakout of the upward-sloping channel formed on a two-hour scale. This has underpinned the Pound Sterling against the US Dollar. The Cable is expected to remain in the bullish territory ahead as the 20-period Exponential Moving Average (EMA) at 1.2575 is supporting the Pound Sterling.

The Relative Strength Index (RSI) (14) is oscillating in the bullish range of 60.00-80.00, indicating that upside momentum is active.