GBP/USD Remains on the Defensive as USD Surges to Year-to-Date High

The GBP/USD pair finds itself in a defensive posture, hovering near multi-month lows reached earlier this week. A confluence of factors has propelled the US Dollar (USD) to fresh year-to-date highs and exerted downward pressure on the British Pound (GBP). The situation appears poised for further bearish sentiment, although oversold conditions on the daily chart are restraining fresh bearish bets.

BoE’s Surprise Pause Weighs on Sterling

The British Pound continues to underperform in the aftermath of a surprising move by the Bank of England (BoE) to halt its interest rate-hiking cycle in September. This marked the first time since December 2021 that the BoE refrained from raising interest rates. Compounding this, the central bank revised down its economic growth forecast for the July-September period from 0.4% to just 0.1% and offered little indication of plans for further rate hikes. This dovish stance, coupled with the prevailing bullish sentiment surrounding the US Dollar, acts as a drag on the GBP/USD pair.

US Dollar Index (DXY) at Yearly Highs

The US Dollar Index (DXY), which gauges the USD against a basket of major currencies, has surged to its highest level since November 2022. This rally is bolstered by growing confidence that the Federal Reserve (Fed) will maintain its hawkish stance. Market expectations include at least one more rate hike by year-end. Adding to this sentiment, Cleveland Fed President Loretta Mester asserted that the US central bank will need to maintain restrictive rates to bring inflation back to its 2% target. Consequently, US Treasury bond yields have reached fresh multi-decade highs, further bolstering the USD.

Risk Aversion Fuels USD Safe-Haven Appeal

In addition to the Fed’s commitment to higher interest rates, a general decline in risk appetite has burnished the US Dollar’s status as a safe-haven currency. The initial response to mixed Chinese Purchasing Managers’ Indices (PMIs) and the passage of a US stopgap funding bill over the weekend proved fleeting. Concerns about the economic headwinds arising from rapidly rising borrowing costs have persisted, prompting investors to seek refuge in traditional safe-haven assets and bolstering USD demand. This further validates the near-term bearish outlook for the GBP/USD pair.

Looking Ahead: Influential Factors

With no significant market-moving economic data scheduled for release from the UK, the GBP/USD pair will largely be at the mercy of USD price dynamics. Later in the early North American session, traders will monitor US Job Openings and Labor Turnover Survey (JOLTS) data. This, along with US bond yields and broader risk sentiment, will shape USD price movements. However, all eyes will remain fixed on the eagerly awaited US Nonfarm Payrolls (NFP) report due later in the week.

In summary, the GBP/USD pair is grappling with bearish pressures as the USD gains momentum on multiple fronts. The BoE’s unexpected policy pause, coupled with USD strength driven by the Fed’s hawkish stance and risk aversion, have combined to weigh on the GBP. While oversold conditions may limit immediate downside potential, the path of least resistance for the GBP/USD pair in the near term appears to favor further USD strength.