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GBP/USD Hits 31-Month Highs as Dollar Weakens

News Summary: The GBP/USD currency pair is trading near 1.3350, close to its 31-month peak, driven by a weakening US dollar and concerns over the UK economy.

News Lead: The GBP/USD currency pair traded around 1.3350 on Tuesday during Asian hours, following its rise to a 31-month high of 1.3359 on Monday, as the US dollar experiences downward pressure due to dovish signals from the Federal Reserve and UK Prime Minister Keir Starmer's warnings of potentially painful economic reforms.

News Body:

The GBP/USD currency pair has shown bullish momentum, maintaining its position near the 1.3350 mark, close to the significant 31-month high of 1.3359 reached on Monday. This surge in the British pound against the US dollar comes amidst increasing expectations for further interest rate cuts by the Federal Reserve in 2024, which has added downward pressure on the US dollar.

Minneapolis Federal Reserve President Neel Kashkari stated on Monday that he anticipates additional interest rate cuts in the upcoming year, albeit smaller than those observed in September's meeting. Chicago Fed President Austan Goolsbee also echoed similar sentiments, suggesting that "many more rate cuts are likely needed over the next year," signaling an increasing likelihood of a dovish stance from the Fed.

Market participants are closely watching the CME FedWatch tool, which indicates a 50% probability of a 75 basis point reduction by the end of this year, projecting the Fed's rate to fall to a range of 4.0% to 4.25%. This dovish outlook has contributed to the weakening of the US dollar and increased attractiveness of the GBP.

In contrast, the UK economic landscape faces scrutiny, as Prime Minister Keir Starmer has expressed concerns about the possibility of “painful” economic reforms, particularly as inflation rates in the UK remain significantly higher than those in other countries. Recent PMI data shows that the country's manufacturing purchasing managers' index (PMI) has decreased from 52.5 in August to 51.5 in September, below market expectations. Similarly, the services PMI dropped from 53.7 to 52.8, indicating slow growth in the services sector.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated that the slight cooling of output growth in manufacturing and services should not be viewed as overly concerning, pointing to potential resilience in the market amidst broader economic challenges.

Despite these warnings, the GBP has extended its winning streak for a fifth consecutive session, buoyed by a global risk appetite as investors anticipate early rate cuts by the Federal Reserve. The strength of the GBP is further bolstered by sentiment that has favored risky assets, as concerns about a global recession appear to ease.

Looking beyond immediate concerns, the GBP/USD pair's strength may face resistance as it approaches higher technical pivot points. Resistance levels are marked at 1.3372 and 1.3400, presenting potential challenges for further escalation in this bullish trend.

Traders are keenly observing upcoming economic data, particularly the S&P Global Manufacturing PMI and construction PMI due for release, which could provide decisive signals about the continuing strength of the UK economy.

Conclusion:

The current performance of the GBP/USD pair reflects a complex interplay of monetary policy expectations from the Bank of England and the Federal Reserve, coupled with UK economic concerns. While the pound is finding support amid a stronger risk appetite, traders remain cautious ahead of upcoming economic data releases and any indications of shifts in central bank policy that could influence the pair's trajectory in the coming weeks. As economic conditions evolve, the focus will remain on the implications of interest rate adjustments and prospects for the UK's economic recovery.

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