Pound US dollar (GBP/USD) wavers amid shifting rate cut bets
Article updated 16:30, 14/08/2024
The pound US dollar (GBP/USD) exchange rate is trapped in a narrow range this afternoon following news that both US and UK inflation came in lower than forecast today.
This morning saw the publication of the UK’s latest consumer price index, showing a smaller-than-forecast acceleration in UK price pressures throughout July. In turn, ramped up Bank of England (BoE) interest rate cut bets initially dented the pound (GBP) during the early hours of today’s European trading hours.
News of significantly easing services inflation further bolstered such assertions, as explains Professor Costas Milas of the University of Liverpool:
‘The BoE has repeatedly mentioned services inflation to justify why MPC members did not cut interest rates earlier. I plot below ‘price surprises in services inflation’ (proxied by the four-quarter difference in services inflation).
Historically, services inflation moves much faster on the way down than on the way up. This plot is telling me that, everything else equal, there is a good reason for MPC members to cut interest rates in September!’
However, an unexpected decline in US inflation this afternoon saw the pound US dollar exchange rate recouping the morning’s losses. US inflation fell to 2.9% in July, rather than holding steady at 3% as expected. Much like its UK counterpart, the US dollar (USD) struggled to attract investor support as the latest domestic inflation release solidified market expectations of a September rate cut by the Federal Reserve next month.
Preston Caldwell, Chief US Economist at Morningstar, observed that today’s data reinforces bets of an aggressive rate cut cycle from the Fed in coming months, stating:
‘Optimal monetary policy calls for a hefty reduction in the federal-funds rate in short order. Markets reflect that, with the federal-funds rate expected to drop to 3.00 to 3.25%, a cut of 200 basis points, by September 2025.
The Fed’s rhetoric is steadily shifting in this direction as well. Our base case for the upcoming September 2024 meeting is still for just a 0.25% cut, rather than the 0.5% point cut that many market participants are now expecting.’
Looking ahead, signs of economic slowing across the UK may see GBP extend its recent losses tomorrow morning, upon the publication of Britain’s latest GDP report.
At the time of writing, GBP/USD is trading at around $1.2844, virtually unchanged from today’s opening levels.
Original article continues below:
Pound US dollar (GBP/USD) exchange rate stumbles following UK inflation release
The pound US dollar exchange rate is declining this morning following a softer-than-expected UK consumer price index.
At the time of writing the GBP/USD exchange rate is trading at around $1.2837, down approximately 0.2% from this morning’s opening rate.
Pound (GBP) slips following UK inflation data
The pound (GBP) is facing headwinds this morning following a cooler-than-forecast batch of UIK inflation data.
Headline inflation accelerated from 2% to 2.2% in July, missing forecasts of a slightly stronger 2.3%.
Meanwhile, core inflation eased to 3.3% last month, dipping from 3.5% and falling below projections of 3.4%.
The milder-than-forecast readings have fuelled a slight uptick in Bank of England (BoE) interest rate cut bets, as inflationary pressures continue to subside.
Capital Economics noted:
‘Importantly for the Bank of England, the decline in services inflation from 5.7% to 5.2% was much bigger than anyone anticipated. That was well below the 5.6% rate forecast by the Bank in August, although closer to our own forecast of 5.4%.’
Services inflation has remained a significant obstacle in the central bank’s disinflation progress in recent months. Could signs of notable cooling in the vital sector keep GBP on the defensive as the session progresses?
US dollar (USD) subdued ahead of inflation data
The US dollar (USD) is trading without a clear direction this morning as investors await the latest American inflation print, due for release this afternoon.
In the wake of a cooler-than-expected producer price index in the US, further proof of cooling price pressures across the US could see the ‘greenback’ trending lower this afternoon.
However, market forecasts have fluctuated in recent days, with economists now anticipating US headline inflation to hold steady at 3% in July.
Carol Kong, currency strategist at CBA, told clients:
‘We expect the market to double down on large interest rate cuts by the FOMC this year if the core CPI increases by 0.1%/month or less, (whereas) we expect the market to largely play down the core CPI if it increases by 0.2%/month or 0.3%/month.’
As markets brace for the market moving release, USD investors may abstain from placing any aggressive bets on the ‘greenback’ in the meantime.
Pound US dollar exchange rate forecast: US inflation in spotlight
Looking ahead, the latest US inflation release will most likely serve as the core catalyst of USD movement this afternoon. Any downward surprises could serve to fuel surmounting expectation of a September interest rate cut by the Federal Reserve.
Alternatively, signs of persistently sticky US inflation could lead pared Fed rate hike bets, thereby bolstering USD against its rivals.
Looking to the UK, the latest GDP data is due for release tomorrow morning. Analysts estimate that the British economy will have expanded by 0.6% throughout the second quarter, slowing from the previous quarter’s 0.7% growth.
Should the data print as forecast, signs of economic slowing may weigh on the pound.