GBP/USD aims to recapture 1.2100 as US Dollar drops amid a recovery in risk-on mood

• GBP/USD is looking to reclaim the immediate resistance of 1.2100 amid a sheer drop in the US Dollar Index.
• A significant recovery in S&P500 has triggered hopes of a decent revival in investors’ risk appetite.
• Economists at TD Securities see that US inflation will remain well above 3% by the end of Q4 2023.

The GBP/USD pair has attempted a rebound and is likely to recapture the immediate resistance of 1.2100 in the early Asian session. The Cable has gained some traction as the US Dollar Index (DXY) has dropped near the lower portion of its weekly trading range around 103.60. The USD Index is oscillating in a range of 103.60-104.50 from the past week due to the absence of critical economic events for a decisive move amid a festive week.

A steep recovery in S&P500 after a two-day sell-off is portraying a decent recovery in the risk appetite theme. Investors jumped to load up beaten-down technology stocks. Meanwhile, the 10-year US Treasury yields witnessed a halt in its four-day winning streak and dropped to 3.82%, showing that volatility is cooling-off.

The US Dollar is not displaying a significant move this week due to a handful of economic events to bring an action in the FX action. On Thursday, the Greenback faced immense pressure after an acceleration in the number of Initial Jobless Claims for the week ending December 23. The Unemployment Claims jumped to 225K from the prior release of 216K. No doubt, the employment generation process has been slowed down led by higher interest rates by the Federal Reserve (Fed), which is resulting in more jobless claims from potential job seekers.

While the Fed is working hard to achieve price stability, economists at TD Securities are of the view that inflation in the United States will remain well above 3% by the end of Q4 2023. “We look for headline inflation to end the year at a robust 7.1% YoY pace in Q4, but to slow to 3.1% in Q4 2023. We also forecast Core CPI inflation to end the year at a still-high 6.0% but to decelerate to 3.3% in Q4 2023.”

On the United Kingdom front, the ending of the CY2023 at a higher inflation rate led by higher energy prices is going to keep the Bank of England (BOE) busy next year in handling the inflation mess. BOE Governor Andrew Bailey might bank upon further increments in the interest rates to trim inflationary pressures.