GBP/USD builds cushion near 1.2600 as BoE’s more rate hikes to trim Fed-BoE policy divergence

• GBP/USD is building a base for a recovery move after correction to near 1.2600.
• The risk profile is cautionary ahead of US debt ceiling negotiations between the White House and top Republican leaders.
• As the Fed is expected to hit a pause ahead, an interest rate hike by the BoE will trim the Fed-BoE policy divergence.

The GBP/USD pair is building a cushion near the round-level support of 1.2600 in the Asian session after a steep correction. The Cable has defended further downside as the US Dollar Index (DXY) is failing to stretch its upside journey after a north-side move to near 101.50.

S&P500 futures are showing nominal losses in Asia, portraying a cautionary risk profile ahead of negotiations for the US debt ceiling by the White House with top Republican leaders. The US Dollar index (DXY) is showing signs of volatility contraction as negotiations for a debt ceiling raise are expected to be heated as Republicans are expected not to approve the deal unless big cuts in President’s spending initiatives are promised by US President Joe Biden.

Apart from that, the US Dollar will remain in action ahead of the release of Wednesday’s Consumer Price Index (CPI) data (April). The street is anticipating a steady inflation report. Meanwhile, Senior Loan Officer Opinion Survey on Bank Lending Practices for April reported that credit demand has weakened and commercial banks have tightened their standards, as reported by the Federal Reserve (Fed). The context is expected to soften inflation further and would cool down tight labor market conditions.

On the Pound Sterling front, the Bank of England (BoE) is expected to continue its policy-tightening regime further as labor shortages and higher food inflation are keeping the United Kingdom’s inflation steadily in double-digit territory. The 12^th consecutive interest rate hike by BoE Governor Andrew Bailey, which is expected by 25 basis points (bps), will push interest rates to 4.50%. As the Fed is expected to hit a pause ahead, an interest rate hike by the BoE will trim the Fed-BoE policy divergence.