GBP/USD trades slightly higher in thin holiday trade ahead of US NFP

• GBP/USD trades slightly higher, with holiday-thinned liquidity keeping price action subdued ahead of US NFP data.
• The US economy is expected to show a modest improvement in hiring, with the Unemployment Rate seen holding steady at 4.4%.
• Oil-driven inflation risks from the US-Iran war complicate the BoE and Fed monetary policy outlook.

The British Pound (GBP) trades slightly higher against the US Dollar (USD) on Friday, as modest softness in the Greenback lends some support. However, price action remains subdued amid thin liquidity conditions due to the Good Friday holiday, with trading activity likely to pick up during the American session as traders await the US Nonfarm Payrolls (NFP) report.

At the time of writing, GBP/USD is trading around 1.3234, after falling to a four-month low at 1.3159 earlier this week. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is hovering near the 100 mark, after touching a 10-month high of 100.64 on Tuesday.

Economists expect the US Nonfarm Payrolls (NFP) report for March to show a modest rebound in hiring, with forecasts pointing to a gain of around 60K jobs after a sharp decline of 92K in February. The Unemployment Rate is expected to hold steady at 4.4%.

A weaker-than-expected reading could weigh on the US Dollar and offer some support to GBP/USD, though gains may remain limited as the ongoing US-Iran war keeps the Greenback broadly supported.

As there are no clear signs of a near-term resolution to the conflict and shipping through the Strait of Hormuz remains largely disrupted, Oil-driven inflation and growth risks are intensifying. This backdrop is reducing expectations for interest rate cuts from both the Bank of England (BoE) and the Federal Reserve (Fed).

Traders are now pricing in two rate hikes from the BoE by year-end, while expecting the Fed to keep interest rates unchanged for longer, a shift from earlier expectations of at least two rate cuts from both central banks.

However, recent central bank messaging suggests policymakers are not in a rush to raise interest rates. Bank of England (BoE) Governor Andrew Bailey said on Wednesday that “markets may be getting ahead of themselves in pricing in interest rate hikes,” adding that policymakers will need to keep a clear focus on risks to growth and jobs, alongside inflation, when making their next decision on rates.

Fed Chair Jerome Powell said recently that policy is “in a good place to wait and see how the current situation plays out,” adding that inflation expectations remain “well anchored beyond the short term.”