GBP/USD looks to surpass 1.2400 as USD Index retreats, BoE policy and US NFP hogs limelight

• GBP/USD is aiming to shift its business above 1.2400 as the USD Index is struggling to build a cushion.
• Federal Reserve has cited hawkish policy guidance despite evidence of inflation softening.
• Bank of England is set to push interest rates to 4% in its battle against the double-digit inflation figure.
• GBP/USD is on the verge of delivering a breakout of the Descending Triangle chart pattern amid a risk-on mood.

GBP/USD has rebounded firmly after a minor corrective move to near 1.2370 in the early European session. The cable is aiming to surpass the immediate resistance of 1.2400 as the US Dollar Index (DXY) has retreated after a pullback move to near 100.60. The USD Index has resumed its downside journey and has refreshed its nine-month low to near 100.48.

The announcement of a less-hawkish monetary policy by the Federal Reserve (Fed) has strengthened the demand for risk-sensitive assets. The improved risk appetite of the market participants has supported the S&P500 futures in range extension towards the upside.  Investors have shrugged off pessimism generated by weak United States ISM Manufacturing PMI and have cheered a smaller interest rate hike by the Federal Reserve (Fed). Despite the extremely positive market sentiment, the return generated by 10-year US Treasury bonds has rebounded to near 3.42%.

Federal Reserve confirms the initiation of a disinflationary process

Plenty of evidence is available that claims that the United States Consumer Price Index (CPI) is confidently declining led by the sheer policy tightening by the Federal Reserve. After observing a slowdown in consumer spending, lower prices of goods and services by factory owners, a fresh decline in labor cost, and three consecutive contractions in the ISM Manufacturing PMI,  one could not deny the fact that inflation softening is progressive.

Meanwhile, Federal Reserve chair Jerome Powell in his commentary on Wednesday while dictating the monetary policy confirmed that the disinflationary process has started now. The Fed hiked interest rates by 25 basis points (bps) to 4.50-4.75% and kept the room open for further hikes as it believes that monetary policy is still not sufficiently restrictive to drag inflation to the 2% target.

US Labor demand exceeds the supply

The Employment data released on Wednesday before the interest rate decision by the Federal Reserve (Fed) surprised the market participants significantly. Automatic Data Processing (Jan) (ADP) agency reported that the United States economy has added 106K fresh talent into the labor market, which was critically lower than the consensus of 178K and the former release of 253K. Contrary to that, Job Openings (Dec) data reported an increment of 572K. Although the economic data is from different months, it still indicates that the labor demand by corporate is exceeding the supply.

For more clarity, investors will keenly focus on the United States Nonfarm Payrolls (NFP) data, which will release on Friday. As per the consensus, the US economy has added 185K jobs in the labor market higher than the prior release of 223K. The Unemployment Rate is seen higher at 3.6% vs. 3.5% released earlier but still near the lowest figures in the past half-century. Apart from that, Average Hourly Earnings data will be of utmost importance.

Bank of England to deliver a hawkish stance on interest rates

Inflationary pressures in the United Kingdom region have not been trimmed decisively as lower energy prices have been offset by higher food prices and rising employment bills. Insufficient labor supply is continuously winning negotiations with recruiters and is leading to stability in the price index at peak levels. The inflation rate is still in the double-digit figure and higher interest rates by the Bank of England (BoE) have impacted the extent of economic activities dramatically but the inflationary pressures are still outside the grip of the Bank of England policymakers.

Strategists at Jefferies cited “We are negative on the UK.” For the BoE, even if we get a 50 basis point (bps) hike in February, it would be a dovish 50 basis points.”

GBP/USD technical outlook

GBP/USD is on the verge of delivering a breakout of the Descending Triangle chart pattern formed on an hourly scale. The Pound Sterling has pushed the cable to near the downward-sloping trendline of the chart pattern placed from January 23 high at 1.2448 while the horizontal support is placed from January 25 low at 1.2283.

The 20-period Exponential Moving Average (EMA) at 1.2365 is scaling north firmly, which indicates that the upside trend carries immense strength.

Meanwhile, the Relative Strength Index (RSI) (14) has shifted into the bullish range of 60.00-80.00, which indicates that bullish momentum is highly active.