Pound US dollar (GBP/USD) exchange rate retreats ahead of BoE interest rate decision
Article updated 16:40, 19/6/2024
The pound US dollar (GBP/USD) exchange rate retreated during the afternoon as investors prepared for the Bank of England’s (BoE) upcoming monetary policy meeting.
After initially strengthening during the morning, the pound (GBP) was largely subdued during the latter part of Wednesday’s session as markets braced themselves for the BoE’s looming interest rate decision.
While the central bank is widely expected to keep interest rates unchanged at a sixteen-year high tomorrow, investors are particularly eager to see analyse the BoE’s forwards guidance. Any further policymaker divergence will be of particular interest to markets, after rate-setters voted seven to two in favour of an interest rate hold last month.
Following this morning’s consumer price index, which fell to the BoE’s 2% target rate, the likelihood of an August rate cut is a key area of focus for markets and economists alike.
Commenting on the latest inflation data, Francesco Pesole, economist at ING, said:
‘The data all but confirms the Bank won’t be cutting rates when it meets tomorrow. But we still have another report in July, and unless that’s a material surprise, we suspect it will still leave the BoE on track for a cut in August.’
Meanwhile, thin trading conditions and a mixed market sentiment saw the US dollar (USD) trade without a clear direction as the session drew to a close.
Looking ahead, could any dovish signals see GBP tumble tomorrow?
At the time of writing, GBP/USD is trading at around $1.2723, virtually unchanged from today’s opening rates.
Original article continues below:
Pound US dollar (GBP/USD) ticks up following UK inflation data
The pound US dollar (GBP/USD) exchange rate is gaining ground this morning despite a cooling UK consumer price index (CPI).
At the time of writing the GBP/USD exchange rate is trading at around $1.2735, up approximately 0.2% from this morning’s opening rate.
Pound (GBP) strengthens despite easing inflation
The pound (GBP) is rising against the majority of its peers this morning following the latest UK inflation data.
Both headline and core inflation cooled as forecast in May, easing to 2% and 3.5%, respectively. Notably, the consumer price index has now landed on the Bank of England’s (BoE) 2% target rate, paving the way for summer interest rate cuts.
However, a stubborn set of services inflation seems to buoy the pound so far this morning. Servies inflation, which is largely affected by domestic goods rather than global inflationary pressures, dipped from 5.9% to 5.7% in May, rather than cooling to 5.3% as expected, which indicates underlying stubborn inflation in Britain.
James Smith, Developed Markets Economist at ING, commented:
‘Indeed at 5.7%, it’s now 0.4 percentage points above the Bank’s forecast from the May Monetary Policy Report. That all but confirms the BoE will keep rates on hold tomorrow. But it doesn’t necessarily change the game for August’s meeting.’
GBP’s gains will likely remain limited as markets place their bets on summer rate cuts, ahead of the BoE’s interest rate decision tomorrow.
In the meantime, GBP may hold steady amid speculations that the BoE will keep interest rates at a sixteen-year high tomorrow.
US dollar (USD) subdued amid data lull
The US dollar (USD) is wavering this morning amid a data-light US calendar.
With fresh releases in short supply, the safe-haven ‘greenback’ is largely vulnerable to market risk dynamics, as mixed trading conditions provide little impetus for USD.
In addition to this, yesterday’s mixed macroeconomic releases weigh on the USD exchange rates amid thin trading conditions.
With retail sales in May rising by a meagre 0.1%, falling below market expectations of a 0.2% increase, and edging up only slightly from a downwardly revised 0.2% contraction, signs of stagnant consumer activity in the US prompted markets to rethink their Federal Reserve interest rate cut expectations.
Paul Ashworth, Chief North America economist at Capital Economics, said:
‘Even a modest slowdown in consumption growth and consequently GDP growth too could be enough to tip a finely balanced Fed in favour of a rate cut in September.’
While Fed policymakers have struck hawkish in recent weeks, advocating for rate cuts in the final quarter of 2024, arising speculations of imminent monetary unwinding may continue to cap USD’s upside potential as the session progresses.
Pound US dollar exchange rate forecast: BoE in focus
Looking ahead, the Bank of England is due to deliver its latest interest rate decision tomorrow afternoon. While the central bank is due to keep rates unchanged, investors are eager to assess this month’s voting split. Any policymaker divergence will reinforce the likelihood of an August rate cut, denting Sterling.
Looking to the US, could a dip in the latest initial jobless claims data lend USD some support?