GBP/USD Drops Below 1.2600 on Strong US Dollar

On Thursday, the GBP/USD currency pair experienced a drop below the 1.2600 level for the first time since June 13, primarily due to the overall strength of the US Dollar (USD). Although the pair managed to recover slightly above that level early on Friday, the technical analysis suggests that the bearish sentiment remains prevalent.

The US Dollar Index, which measures the performance of the USD against a basket of six major currencies, surged to its highest level in over two weeks, surpassing 103.00 on Thursday. This significant rally was fueled by positive macroeconomic data releases from the US. The year-on-year Gross Domestic Product (GDP) growth for the first quarter was revised higher from 1.3% to 2%, indicating a stronger economy. Additionally, the weekly Initial Jobless Claims fell by 26,000 to 239,000 for the week ending June 24, further supporting the USD.

Early on Friday, the UK's FTSE 100 Index showed a 0.5% increase, while US stock index futures traded with mixed results. Although the market's positive risk sentiment could assist in limiting losses for GBP/USD, the upcoming release of the US Personal Consumption Expenditures (PCE) Price Index figures could cause investors to overlook the prevailing market mood.

In terms of monthly data, the Core PCE Price Index, which excludes volatile food and energy prices, is projected to match the 0.4% increase recorded in April when the May figures are released. If this data reports a higher-than-expected increase, it may prompt the market to factor in the possibility of two additional 25 basis points rate hikes by the Federal Reserve (Fed) in the second half of 2023, thereby strengthening the USD. Consequently, there is a potential for GBP/USD to experience further declines. In such a scenario, a bullish position near the 61.8% Fibonacci level could be sought for a long setup.