GBP/USD Attempts to Find Support at 1.2000 as Traders Ponder Fed's Next Move

The dollar took a breather on Tuesday, drifting away from its dazzling opening of the week. However, it still lingered near a one-month pinnacle, as the traders elevated their projections of the interest rate levels the U.S. Federal Reserve would need to rein in inflation.

While the Australian dollar soared in the aftermath of the Reserve Bank of Australia's (RBA) interest rate declaration, skyrocketing as much as 1% to reach an intra-day peak of $0.6952.

The RBA made a move on Tuesday, raising its cash rate by a predictable 25 basis points and signalling further hikes ahead.

With its February policy meeting wrapped up, the RBA declared that core inflation was higher than anticipated and that higher rates would be necessary to bring inflation back to its target of 2%-3%.

On the other hand, the markets were still recovering from the Friday shocker, the United States jobs report that stunned traders who were banking on an impending pause in the Fed's rate-hiking cycle. The report showed a jaw-dropping increase of 517,000 non-farm payrolls in January, indicating a tenaciously resilient labour market.

While the report gave the U.S. currency a boost in the previous sessions, it gave back some gains in the Asia trade on Tuesday.

Sterling, was last seen 0.27% higher at $1.2054, after plummeting to a one-month low of $1.2006 in the previous session. The kiwi, on the other hand, rose by 0.29% to $0.6323 but was still close to Monday's one-month trough of $0.6271.

The euro, gained 0.12% to reach $1.0739, after sliding to $1.0709 in the previous session, the lowest since January 9th.

U.S. Treasury yields have gone up in light of the increased rate expectations, with two-year yields reaching a one-month high of 4.4930% on Monday. The benchmark 10-year yields were last seen at 3.6193%, having similarly climbed to a four-week peak of 3.6550% in the previous session.

Futures pricing indicates that the markets are expecting the Fed funds rate to peak just above 5.1% by June, compared to expectations of less than 5% before Friday's jobs report.

The mighty U.S. currency pushed the U.S. dollar index to a near one-month high of 103.76 on Monday and was last seen 0.15% lower at 103.45.

In Asia, the Japanese yen rose by 0.3% to 132.24 per dollar but remained close to Monday's one-month low of 132.90 per dollar. Data on Tuesday showed that Japan's real wages rose in December for the first time in nine months, however, uncertainty still remains over whether the pay hikes will continue to sustain the country's economic recovery.

GBP/USD Struggles to Sustain Gains

On Tuesday, the GBP/USD currency duo twirls and twirls near the mystical number of 1.2000, finally catching its breath from a three-day tumble and resting at a one-month low. Yet, just as quickly as it rises, it falls back down to remain below both the 50-day and 200-day EMAs, as if it's trying to catch a second wind towards the 1.1850.

The US monthly jobs report lit a fire under the US Dollar, causing it to soar from a nine-month low set just days before. However, this impressive feat has since come to a halt, with a slight dip in the US Treasury bond yields playing the role of a roadblock. Despite this setback, the GBP/USD pair remains determined to find its footing, albeit with a cautious approach.

Investors now believe that the Federal Reserve is in it for the long haul, with its hawkish stance reinforced by the impressive US NFP report. This bodes well for the US bond yields and, in turn, the USD, causing a temporary roadblock for the GBP/USD pair.

The Bank of England's policy decision last week cast a shadow of doubt on the GBP, with Governor Andrew Bailey predicting that inflation will continue to drop this year and even more rapidly in the latter half of 2023. This fuels speculations that the current rate-hiking cycle might be coming to an end, further solidifying the GBP/USD pair's near-term downward trajectory.

With no significant market-moving data on the horizon for Tuesday, all eyes are set on Fed Chair Jerome Powell's speech later in the day. Along with the US bond yields and the overall risk sentiment, this speech will be the driving force behind the USD and add some momentum to the GBP/USD pair's journey.