GBP/USD Exchange Rate Muted as US Core Inflation Slows
Updated: The Pound Sterling to US Dollar (GBP/USD) exchange rate was rangebound on Monday afternoon, trading at around $1.2917, following the publication of the latest US PCE Price Index.
The index revealed core inflation in the US slowed to just 1.6% in March, the lowest levels since August as added to speculation that calls for a rate cut from within the Federal Reserve may become louder in the coming months.
Meanwhile the Pound was pressure by lingering Brexit uncertainty on Monday, with the ongoing deadlock in cross-party talks resulting in GBP/USD relinquish its initial gains from the start of the session.
GBP/USD Exchange Rate Buoyed by Fed Rate Speculation
The Pound Sterling to US Dollar (GBP/USD) exchange rate edged higher at the start of this week’s session as the latest US GDP figures prompt speculation that the Federal Reserve will adopt a more dovish outlook this year.
At the time of writing the GBP/USD exchange rate is drifting higher, propelling the pairing to around $1.2944.
US Dollar (USD) Slips amid Fears of a More Dovish Fed
The US Dollar (USD) opens this week on the defensive against the Pound (GBP) and the majority of its other peers, following on from the pull-back in the ‘Greenback’ at the end of last week’s session.
This comes in the wake of the publication of the latest US GDP figures on Friday which – despite a solid rise in headline growth in the first quarter – saw USD sentiment weaken as it masked a sharp decline in consumer consumption.
With household consumption making up the largest part of the US economy and analysts warning that the positive contributors in the Q1 will likely fade in Q2, investors have begun to speculate how the Federal Reserve will respond.
While economists don’t expect a knee-jerk response from the Fed following its policy meeting this week, the recent GDP figures and weak inflation have prompted some speculation the central bank will adopt a more dovish approach to its monetary policy later in the year, potentially even leading to a rate cut down the line.
Ray Attrill, Head of FX Strategy at the National Australia Bank, said:
‘The Fed’s preferred core PCE deflator fell to 1.3%, down sharply from 1.8% in Q4 and below the 1.4% consensus estimate.
‘Interest rate markets moved the implied probability of a 2019 easing out to 106% from 90% prior to the GDP release.’
However, with most other central banks also turning dovish this year, the US Dollar may remain in a position of relative strength given that a series of rate hikes over the last couple of years still leaves the US more attractive than its peers.
GBP/USD Exchange Rate Forecast: Upbeat BoE to Lend Support to the Pound this Week?
Looking ahead to the rest of this week’s session, the Pound US Dollar (GBP/USD) exchange rate could find some support in the second half of the session as the Bank of England (BoE) concludes its own policy meeting.
Again no policy changes are forecast from the BoE this week as Brexit uncertainty continues to limit the bank’s options.
However policymakers could offer a lifeline to Sterling if they appear more confident in their outlook for 2019 given the recent uptick in UK growth.
Also likely to influence GBP exchange rates will be the publication of the UK’s PMI figures, where a rebound in the services sector may lend support to the Pound.
Meanwhile, apart from the Fed’s rate decision on Wednesday the focus for USD investors this week will be on US payroll figures at the end of the session, with the US Dollar potentially recouping some ground if employment accelerated in April.