Stronger US dollar drags GBP/USD pair lower

The GBP/USD pair retraces below 1.2800 on the stronger US dollar ahead of Powell testimony and the Bank of England’s policy decision.

The stronger US Dollar, driven by expectations of further tightening by the Fed and an overbought US equity market, has influenced the pair’s price movement. Fed Chair Jerome Powell’s upcoming testimony before the US Congress could further influence the dollar, with potential bullish or bearish implications.

Markets expect the British central bank to raise rates by 25 bps on Thursday, which can potentially underpin the GBP/USD toward 1.30, especially if inflation data comes hot. Expectations for additional tightening by the US Federal Reserve (Fed) and an “overbought” US equity market dampened investors’ mood. At the time of writing, the GBP/USD is trading at 1.2755 after hitting a high of 1.2806.

Last week, the Fed held rates unchanged at their June monetary policy but upward revised peak rates at 5.6%, according to the dot plots. That strengthened the US dollar, which was hurt by Fed Chair Jerome Powell, who struck a neutral tone, disappointing US dollar bulls, so the GBP/USD continued towards its YTD high. But last Friday, hawkish comments by Fed Governor Christopher Waller and Thomas Barkin weighed on traders after Monday’s holiday in the US.