After approaching the 1.2560 price level, the GBP/USD pair retreated during the European trading session. It appears the cable faced some hurdles as it got near the 1.2600 price level.
In addition, the US Dollar Index is also flexing its muscles with a solid recovery which also established a downbeat down in the GBP/USD. For now, the investors are anxious about the upcoming interest rate decision and it is showing in the GBP/USD pair.
If we look around, the S&P 500 from the USA is also showing choppy price action ahead of the Fed meeting. For now, the market is inclined towards the possibility that Fed will adopt a neutral approach by not introducing any rate hikes. If we look at the CME fed watch tool, the chances of no rate hikes and rate hikes are now standing at 75%.
USD Index In Recovery Mode
The USD index is showing signs of recovery as it was last seen near the 103.50 level. According to experts, the US inflation report and the Fed policy rate are the biggest factors that are affecting the USD index and the GBP/USD.
Earlier reading of the CPI showed a contraction in the inflation and the same is expected from the upcoming reading as well.
However, another thing to note is that the labor market conditions in the USA are getting weak along with weaker economic conditions. The one factor that could twist the Fed's arm into raising the rates once again is the persistence of inflation in the country.
According to Rabobank analysts, the Fed will introduce rate hikes at the July meeting. They added that around 25 bps worth of rate hikes will occur during July. After that, the rest of 2023 will be without any additional rate hikes.
In addition, the employment data from the UK is also pending which will affect the GBP pairs. So when we combine that with the data released from the USA, it appears that some serious liquidity will enter the GBP/USD pair.