GBP/USD advances to fresh multi-month peak, eyes mid-1.2700s amid bearish USD

• GBP/USD gains positive traction for the fifth successive day and climbs to a fresh three-month top.
• Bets that the Fed is done raising rates and may start easing the policy in 2024 undermine the USD.
• Diminishing odds for an early BoE rate cut remain supportive of the strong follow-through move-up.

The GBP/USD pair scales higher for the fifth straight day – also marking the eighth day of a positive move in the previous nine – and advances to a fresh three-month peak during the Asian session on Wednesday. Spot prices currently trade around the 1.2715-1.2720 region, up 0.20% for the day, and seem poised to prolong a near three-week-old uptrend in the wake of sustained US Dollar (USD) selling.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, sinks to its lowest level since August 11 amid rising bets for a series of rate cuts by the Federal Reserve (Fed) in 2024. The expectations were reaffirmed by the overnight dovish remarks by Fed Governor Christopher Waller, saying that policy is currently well positioned to slow the economy and get inflation back to the 2% target. Waller added that there are good economic arguments that if inflation continues to decline for several more months, it is possible to lower the policy rate.

Moreover, the CME group's FedWatch tool indicates a 33% chance and a roughly 65% probability of a rate cut in March and May, respectively. This, in turn, drags the yield on the benchmark 10-year US government bond to 4.274%, or its lowest level since mid-September and continues to undermine the buck. Apart from this, a generally positive tone around the US equity futures turns out to be another factor weighing on the safe-haven Greenback and acting as a tailwind for the GBP/USD pair amid diminishing odds for an early rate cut by the Bank of England (BoE).

BoE Governor Andrew Bailey warned last week that it was too early to declare victory over inflation and predicted that monetary policy will have to stay restrictive for quite some time to make sure that inflation gets back to the 2% target. Echoing the view, BoE Deputy Governor for Markets and Banking, Dave Ramsden said on Tuesday that monetary policy is likely to need to be restrictive for an extended period of time to get inflation back to the 2% target. This, in turn, is seen acting as a tailwind for the British Pound (GBP) and contributing to the GBP/USD pair move up.

There isn't any relevant market-moving macro data due for release from the UK on Wednesday, while the US economic docket features the prelim or the second estimate of the third quarter GDP growth figures. This, along with the US bond yields, will influence the USD price dynamics and provide some impetus to the GBP/USD pair. Traders will further take cues from BoE Governor Andrew Bailey's remarks later during the US session to grab short-term opportunities. The fundamental backdrop, meanwhile, remains tilted in favour of bulls and supports prospects for additional gains.

Technical levels to watch