The pound US dollar (GBP/USD) exchange rate is firming today as pound (GBP) investors anticipate an increase in the UK’s annualised core inflation reading. Tomorrow’s consumer price data is expected to encourage the Bank of England (BoE) in its hawkish interest rate stance.
At the time of writing, GBP/USD is trading at $1.3194, marginally higher than this time yesterday.
Pound (GBP) rises on central bank optimism
Ahead of tomorrow’s inflation data for the month of August, GBP investors are trading with bullish conviction. The release is expected to reveal an increase in core price pressures, encouraging the BoE to unwind restrictive monetary policy at a slower pace than other central banks.
Despite a lack of key UK data in the interim, weakness in other currencies places Sterling in good stead. Moreover, the Bank of England’s interest rate decision later this week is expected to reveal a rate hold regardless of August’s inflation outcome.
Commenting upon the upcoming BoE announcement, Niels Christensen of Nordea predicts that the Bank of England will be ‘a little bit less aggressive’ on rate cuts on account of an expected rise in core inflation.
Agreeing with Christensen, Volkmar Baur, FX strategist at Commerzbank, remarks:
‘The expected rise in the core rate is one of the reasons why we do not expect a change in the key rate.’
Elsewhere, a risk-on mood appears to lend additional support to GBP exchange rates. Bullish momentum is evident from an upswing in Australian dollar (AUD) appeal despite disappointing data from China.
US dollar (USD) downturn suspended as retail data impresses
The US dollar (USD) regained some of its losses during Tuesday’s European afternoon, as the latest US retail data exceeded expectations.
US sales were expected to have fallen by 0.2% in August on a monthly basis, but instead increased by 0.1%. Analysts attributed the rise to increased spending at miscellaneous stores and nonstore retailers, remarking that consumer spending appears to be stronger than thought.
Capping tailwinds, however, may have been the fact that excluding auto sales, retail activity missed forecasts. Last month’s sales data was expected to print at 0.2% excluding motor vehicles, but instead came in at 0.1%.
Despite the miss though, the release marked the fourth month of growth. Experts intimate that resilient household demand is likely to be a relief for Federal Reserve policymakers, suggesting that the economy is on solid footing; ahead of tomorrow’s interest rate decision, USD could enjoy additional strength.
GBP/USD exchange rate forecast: Fed decision to drive movement?
Looking ahead, the Federal Reserve’s interest rate decision is likely to be the main trading stimulus tomorrow for the GBP/USD exchange rate.
If the central bank cuts interest rates by more than the 25bps forecast, the ‘Greenback’ could easily plummet, boosting the pound. On the other hand, a quarter-point cut and a hawkish tone from Fed officials could inspire USD tailwinds.
Ahead of the announcement, UK inflation is likely to drive GBP/USD movement. If core UK price pressures intensified in August, Sterling is likely to climb on predictions of a bold monetary policy approach by the BoE.