Pound US dollar exchange rate buoyed by UK CPI figures
The pound US dollar (GBP/USD) exchange rate is on the rise this morning as markets digest the UK’s latest consumer price index.
At the time of writing the GBP/USD exchange rate is trading at around $1.3207, Up roughly 0.3% from this morning’s opening levels.
Pound (GBP) firms as UK inflation figures weaken BoE rate cut bets
The pound (GBP) is off to a strong start this morning, after the European session kicked off with the publication of the UK’s latest inflation figures.
According to data published by the Office for National Statistics (ONS), UK headline inflation held at 2.2% in August, while underlying inflation accelerated from 3.3% to 3.6%.
While at 2.2% inflation is just shy of the Bank of England’s (BoE) 2% target, analysts suggest that strong services inflation and the prospect of rising public sector wages could give the BoE’s Monetary Policy Committee (MPC) pause for thought when it comes to cutting interest rates.
Professor Costas Milas of the University of Liverpool, comments:
‘Services inflation, a good proxy for domestic pressures has gone up to 5.6% in August.
‘I still believe that the latest public sector wage increases of 5.5% will push up services inflation (and therefore CPI inflation) further within the next 9 months as I pointed out in a recent London School of Economics Business blog. This suggests the Bank’s MPC should, for the time being, keep interest rates unchanged.’
While today’s inflation figures are unlikely to deter bets for a November rate cut from the BoE, it’s reinforcing expectations that the bank’s rate cutting cycle will be less aggressive than the Federal Reserve or European Central Bank (ECB).
US dollar (USD) subdued in advance of Fed rate decision
The US dollar (USD) is struggling to attract support this morning. Investors are shying away from the currency as the Federal Reserve prepares to deliver its latest interest rate decision.
The Fed is widely expected to conclude this month’s monetary policy meeting by announcing its first interest rate cut since 2020.
However, the focus is on the size of the cut, with USD investors wary as CME’s FedWatch tool places the odds of a larger 50 basis point cut at over 60%.
Pound US dollar exchange rate forecast: Bumper Fed rate cut to propel GBP/USD to new 28-month high?
Looking ahead, the Fed’s rate decision this evening will undoubtedly act as the main catalyst of movement in the pound US dollar exchange rate through the middle of this week.
This could see the GBP/USD exchange rate retest the 28-month high struck in late August, if an oversized 50bps rate cut is seen as kicking off an aggressive cutting cycle by the Fed.
On the other hand, the US dollar may surge if the bank instead opts for a more modest 25bps cut.
Meanwhile the focus for GBP investors in the second half of the week will turn to the BoE’s own interest rate decision.
The BoE is widely expected to leave rates on hold this month. Will this divergence from the Fed help underpin GBP/USD?