GBP/USD strengthens further beyond 1.2700, over two-week top on weaker USD

• GBP/USD prolongs its multi-day-old uptrend and climbs to a two-week high on Friday.
• Reduced bets for a December BoE rate cut lend support to the pair amid a softer USD.
• Geopolitical risks and trade war fears could limit the USD fall and cap gains for the pair. 

The GBP/USD pair gains some follow-through positive traction during the Asian session on Friday and touches a two-week top, around the 1.2715 region in the last hour. Spot prices have now rallied over 200 pips from the weekly trough and look to build on the recent recovery from sub-1.2500 levels, or the lowest since May 2024 touched last Friday amid subdued US Dollar (USD) demand.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, struggles to capitalize on the overnight modest gains and languishes near a two-week low amid bets for another interest rate cut by the Federal Reserve (Fed) in December. In fact, the current market pricing indicates a 70% chance that the US Central Bank will lower borrowing costs by 25 basis points next month. This, along with the recent decline in the US Treasury bond yields, keeps the USD bulls on the defensive and turns out to be a key factor acting as a tailwind for the GBP/USD pair. 

Meanwhile, traders have been scaling back their bets for another interest rate cut by the Bank of England (BoE) this year after data released last week showed that the underlying price growth in the UK gathered speed in October. This further contributes to the British Pound's (GBP) relative outperformance against its American counterpart and validates the positive outlook for the GBP/USD pair. However, a combination of factors might hold back traders from placing aggressive bearish bets around the USD and cap any meaningful appreciating move for the currency pair. 

The US PCE data released on Wednesday showed that the progress in lowering inflation in the US stalled in October. Moreover, investors now seem convinced that US President-elect Donald Trump's expansionary policies will boost inflation. This comes on top of hawkish FOMC meeting minutes earlier this week, which revealed that the Committee could pause its easing of the policy rate if inflation remained elevated. Apart from this, geopolitical risks and trade war fears could benefit the Greenback's relative safe-haven status and cap the upside for the GBP/USD pair.