**GBP/USD and USD/CAD Outlook: U.S. Dollar Under Pressure as Market Volatility Subsides**
*Original article by Fiona Cincotta, rewritten and expanded*
As the financial markets head into the midweek, the U.S. dollar continues to falter amidst subdued volatility and growing investor appetite for risk. Currency pairs like GBP/USD and USD/CAD are showing notable movements as shifting sentiment, softer economic data, and central bank divergences influence global forex dynamics. While the greenback had once benefitted from safe-haven flows and higher U.S. Treasury yields, current market momentum is beginning to favor risk-on currencies and oil-linked FX pairs.
In this article, we evaluate recent developments and the broader outlook for GBP/USD and USD/CAD, two key pairs that offer a glimpse into the shifting macroeconomic landscape.
## U.S. Dollar Continues to Drift Lower
The U.S. dollar index (DXY), which measures the dollar’s value against a basket of major currencies, has been sliding from recent highs. After peaking near 106 in mid-May, the index has come under selling pressure amid a combination of softer U.S. economic data and signals that the Federal Reserve may soon be ready to ease monetary policy.
Key Drivers Behind Dollar Weakness:
– **Softening Economic Data**: Recent U.S. economic releases, such as lower-than-expected job growth, a cooling labor market, and declining inflation figures, have tempered expectations of further rate hikes.
– **Fed Policy Dilemma**: While the Federal Reserve remains cautious, the market now projects at least one or two rate cuts before the end of 2024. Comments from policymakers suggest a growing openness to policy easing if inflation trends continue lower.
– **Equity Market Rally**: Global stock markets are pushing higher after strong earnings reports and recovering tech stocks. Rising equities often correlate with risk-on sentiment, weakening demand for the safe-haven U.S. dollar.
– **Volatility Retreat**: The CBOE Volatility Index (VIX) has dropped to multi-month lows, indicating lower market anxiety. When volatility declines, investors typically pursue higher-yielding, riskier assets.
– **Other Developed Economies Catching Up**: Central banks in the UK and Canada are also managing the inflationary cycle with their rate approaches, contributing to investor interest in respective currencies.
## GBP/USD Rally Amid Risk Appetite and UK Resilience
The British pound has seen sustained strength against the U.S. dollar, with GBP/USD climbing beyond 1.27. Fueled by weakened USD demand and a surprisingly resilient UK economy, the pair has regained crucial support levels and now targets fresh upside in the near-term technical landscape.
Factors Supporting the GBP/USD Rally:
– **Resilient UK Labor Market**: Despite inflation cooling in the UK, the labor market remains tight. Wage growth, especially in the services sector, remains robust. This challenges the Bank of England’s attempts to fully pivot to a dovish stance.
– **BoE Policy Outlook**: Unlike the Fed, the Bank of England has outlined only one potential rate cut in the next year, signaling a more hawkish approach relative to peers. Markets now price in the possibility of the BoE maintaining higher rates longer than initially expected.
– **Economic Indicators Showing Stability**: Surveys such as the UK PMI and retail sales data have shown improvement. UK GDP grew by 0.6% in Q1 2024, the fastest quarterly pace since late 2021, which improves investor confidence.
– **Political Stability Ahead of Elections**: While UK elections are scheduled for later in the year, the risk premium attached to political uncertainty has been relatively muted, especially when compared to the U.S. presidential contest.
Technical Snapshot for GBP/USD:
– **Near-Term Resistance**: The bulls are targeting the 1.2800 psychological resistance, a level last seen earlier in 2024.
– **Immediate Support**: Should
Read more on USD/CAD trading.