GBP/USD surrenders 1.2400 as US Dollar recovers, BOE policy eyed

• GBP/USD has slipped below 1.2400 amid a decent recovery in the US Dollar Index.
• Hawkish Fed guidance is supporting the US Dollar.
• The BOE is expected to hike interest rates further despite softening UK inflation.

The GBP/USD pair has dropped below the round-level support of 1.2400 in the Asian session. The Cable has witnessed selling pressure as the US Dollar has recovered on higher interest rate peak guidance by the Federal Reserve (Fed).

S&P500 futures have surrendered their gains recorded in early Tokyo and are expected to extend losses further as the risk aversion theme is gaining traction. The US Dollar Index (DXY) has extended its gains above 103.80 after registering a fresh six-month low at 103.49. Also, 10-year US Treasury yields have rebounded above 3.51% as the demand for US Treasury bonds has trimmed.

Investors are restricting themselves from parking their money in US government bonds as Fed chair Jerome Powell has cited a new threat that could dampen softening United States Consumer Price Index (CPI) data. Fed’s Powell hopes that an absence of slowdown in Average Hourly Earnings could be a threat to decelerating inflation as higher earnings will compel households to accelerate their demand. This would result in an extension in the price growth of goods and services by firms.

Also, the Fed has escalated interest rate peak guidance at 5.1% and higher borrowing costs could result in increasing financial risks to various firms. Companies that are not cash-rich and are highly dependent on borrowed money to augment their capital needs for long-term and recurring operations will face immense pressure.

On the United Kingdom front, headline annual inflation dropped to 10.7% vs. the expectations and the prior release of 10.9% and 11.1% respectively. Also, the core CPI that excludes oil and gas prices has declined to 6.3%. The Bank of England (BOE) is expected to hike interest rates further despite a decline in United Kingdom inflation as the road to price stability is still out of the sight.