GBP/USD finds cushion around 1.2300 as USD Index retreats, Fed-BoE policy hogs limelight

• GBP/USD has built an intermediate cushion around 1.2300 as USD Index faces selling pressure.
• Goldman Sachs sees two additional 25 bps rate hikes by the Fed after a 25 bp rate hike announcement on Wednesday.
• The BoE might continue with bigger interest rate hikes to tame soaring inflation.

The GBP/USD pair has gauged an intermediate cushion after dropping to near the crucial support around 1.2300 in the Asian session. The Cable has gained traction as the US Dollar Index (DXY) has retreated after a pullback move to near 101.80. It would be early to consider the halt in the Pound Sterling downside as a bullish reversal as the FX domain is likely to remain volatile ahead of the interest rate decision by the Federal Reserve (Fed).

Meanwhile, the risk profile is still in favor of safe-haven assets. S&P500 futures are carrying losses in Asia despite a bullish Tuesday session as investors are worried that the continuation of policy tightening by the Fed will dampen the scale of economic activities in the United States. Investors should brace for escalating recession fears and higher interest rates will put a dent in the morale of producers.

Contrary to the risk-aversion theme, the demand for US government bonds is increasing. This has led to a decline in the 10-year US Treasury yields below 3.51%.

Meanwhile, economists at Goldman Sachs have come up with expectations for dictations by Fed chair Jerome Powell in February’s monetary policy meeting. They believe that "Since the FOMC last met in December, incoming data on wage growth and inflation have been encouraging, while signals on activity growth have been mixed and at times concerning. This ended up making the case for slowing the pace of rate hikes to 25bp this week quite easy.”

For further guidance, Goldman Sachs expects two additional 25bp hikes in March and May, but fewer might be needed if weak business confidence depresses hiring and investment.

On the United Kingdom front, the absence of inflation slowdown signals and rising wage growth due to a tight labor market are bolstering the case of a higher interest rate hike by the Bank of England (BoE). As per the consensus, BoE Governor Andrew Bailey is expected to announce a 50 basis point (bps) interest rate hike to 4.00%.