Pound US Dollar (GBP/USD) Exchange Rate Extends Slump Thanks to BoE Rate Cut Bets

Heightened Odds of BoE Interest Rate Cut Drag on Pound Sterling US Dollar (GBP/USD) Exchange Rate

The Pound Sterling to US Dollar (GBP/USD) exchange rate remained on the back foot this morning as investors continued to fret over the possibility of an imminent Bank of England (BoE) interest rate cut.

With BoE policymakers looking increasingly dovish in nature markets have hurried to price in higher odds of a rate cut coming at the end of the month.

In the absence of any fresh UK data this has left Pound Sterling (GBP) under pressure against its rivals as worries over the health of the economic outlook linger.

As long as the risk of imminent monetary loosening lingers support for GBP exchange rates looks set to remain muted, even as focus shifts towards Brexit-based developments.

Positive Fed Comments Shore up US Dollar Demand

Comments from Boston Fed President Eric Rosengren helped to keep the US Dollar (USD) on a generally positive footing, meanwhile.

As Rosengren indicated that he sees no real need to do much in terms of interest rates at present this encouraged hopes that the central bank could remain on hold for longer.

With policymakers taking a relatively optimistic view of the economic outlook the odds of any future interest rate cut have diminished, to the benefit of USD exchange rates.

While market risk appetite generally picked up ahead of the impending signing off of the phase one US-China trade agreement this was not enough to drag on the safe-haven US Dollar.

Acceleration in US Consumer Price Index Forecast to Boost US Dollar

Demand for the US Dollar could improve this afternoon if December’s US consumer price index strengthens as forecast.

The headline inflation rate looks set to accelerate from 2.1% to 2.3% on the year, suggesting that price pressures within the world’s largest economy are continuing to build.

However, the positive impact of any uptick could ultimately prove limited thanks to the fact that the CPI is not the Fed’s preferred measure of inflation.

Even so, as long as Fed policymakers appear prepared to leave interest rates on hold in the near future this should keep a floor under USD exchange rates.

GBP/USD Exchange Rate Set for Further Losses Unless UK Inflation Impresses

The GBP/USD exchange rate may extend its downtrend further on Wednesday, meanwhile, unless the latest UK inflation data impresses.

With the BoE already looking set to take a more cautious assessment at its January policy meeting anything short of a solid increase in inflation could weigh heavily on the Pound.

As forecasts point towards a slight easing in the core consumer price index this could prompt an additional Pound sell-off, as weaker inflation signals are likely to encourage BoE dovishness.

Without evidence that inflation is on track to meet the BoE’s 2% target the odds of an imminent rate cut are likely to rise further, to the detriment of the GBP/USD exchange rate.

Louisa Heath

Contact Louisa Heath