British Pound Climbs to Session Highs of 1.3420 as US Dollar Weakens Broadly

• GBP/USD rebounds from below 1.3350 to 1.3420 as stronger risk appetite weighs on the US Dollar.
• Oil holds close to two-month lows on hopes that negotiations will bring an end to Iran’s war.
• Robust US economic figures and expectations of Fed tightening are likely to limit the USD’s losses.
  

At around 1.3420 at the time of writing, GBP/USD has recovered from Friday’s lows below 1.3350, bringing last week’s highs near 1.3500 into focus for bulls. The British Pound (GBP) is recouping most of the losses recorded over the previous two days on Monday, as upbeat market sentiment weighs on the US Dollar (USD).

Progress towards a peace agreement between the US and Iran has, for now at least, outweighed last week’s concerns over an AI bubble. The improved mood is prompting investors to sell the US Dollar on Monday in favour of currencies perceived as riskier, including the British Pound, while oil prices remain steady near two-month lows.

With no major US or UK data releases scheduled for Monday, last week’s hawkish-leaning monetary policy statement from the Bank of England (BoE) is providing some support for sterling. Last Thursday, the BoE moved interest rates by a quarter point to 4%, while some policymakers advocated further increases to return inflation to target. Governor Bailey backed that position, keeping the possibility of additional monetary tightening open.

Robust US data and Fed rate-rise expectations set to curb USD losses

Nevertheless, recent US economic figures have favoured the US Dollar. A stronger-than-expected October Nonfarm Payrolls (NFP) report, alongside a fall in the Unemployment Rate, created conditions conducive to further monetary tightening by the Fed. Following the NFP release, Fed policymakers highlighted elevated inflationary pressures, fuelling expectations of a December rate rise.

Attention this week therefore turns to Tuesday’s US Consumer Price Index (CPI) release. The figures are expected to indicate a further acceleration in prices during October.

According to strategists at ING, “contagion from AI to defensive stocks in the US and worldwide allowed the Dollar to rally even before the strong US jobs market report.” They warn, however, that the rally may not last, noting that “unless risk sentiment remains poor this week, lower front-end US rates should favour a weaker Dollar, even if inflation tomorrow comes in slightly hotter than expected.”