Pound US Dollar (GBP/USD) exchange rate dips as UK shop inflation eases

Pound US Dollar (GBP/USD) exchange rate ticks lower amid signs of easing UK inflation

The Pound US Dollar (GBP/USD) exchange rate is on the back foot this morning, as a cooldown in UK shop inflation stokes UK interest rate cut speculation.

At the time of writing, GBP/USD is trading at $1.2676, down approximately 0.3% from this morning’s opening rate.

Pound (GBP) dented amid cooling shop inflation

The Pound (GBP) has ticked lower against its peers this morning, following fresh reports that UK shop inflation has fallen to its lowest level since May 2022.

A report from the British Retail Consortium (BRC) and Nielsen IQ highlighted that shop price inflation fell to 2.9% in January, a sharp cooldown from December’s figure of 4.3%.

Helen Dickinson, Chief Executive of the BRC, said:

‘Some New Year cheer as January shop price inflation slid to its lowest level since May 2022. Non-food goods drove the fall, as many retailers offered heavily discounted goods in their January sales to entice consumer spend amidst weak demand.’

With the Bank of England’s (BoE) interest rate decision looming, the new report is weighing on the Pound this morning, as speculation continues to mount on looming interest rate cuts.

US Dollar (USD) muted ahead of jobs data

The US Dollar (USD) is trapped in a narrow range against its peers this morning, as USD investors likely await the latest JOLTs job openings for December to be released later this afternoon.

The figures are expected to portray a decline in the American labour market, as data for December is expected to show a decrease of jobs available in the US from 8.79 million, down to 8.75 million. With the Federal Reserve decision due on Wednesday, investors are reluctant to place any aggressive bets as they await the data.

A cautiously upbeat market mood this morning has been pressuring the safe-haven ‘Greenbank’ in the interim, with investors pleased that the Eurozone avoided a recession last year.

The slight uptick in risk appetite seems to be capping the safe-haven US Dollar against the increasingly risk-sensitive Pound.

GBP/USD exchange rate forecast: Fed interest rate decision to boost USD?

Looking ahead, the key driver of movement for the pairing will likely be tomorrow’s Federal Reserve interest rate decision.

With rates widely expected to remain unchanged at 5.5%, USD investors will focus on the central bank’s tone and commentary surrounding monetary policy in the first half of 2024.

According to the CME’s FedWatch Tool, markets are now pricing in an almost 50% chance of a rate cut in March. However, should officials aim to dispel looming rate cut speculation, USD could rise.

Turning to the Pound, Thursday will bring with it the Bank of England’s latest interest rate decision.

If there are any signs that policymakers are starting to consider rate cuts soon, this may leave Sterling facing fresh headwinds in the latter stages of the week.

Sarah Ebrahem

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