The Pound Sterling (GBP) rose against the US Dollar (USD) in Wednesday’s London session following a slight correction from a near four-week high of 1.2850 earlier this week. The GBP/USD pair maintains strong appeal amid growing speculation that the Federal Reserve (Fed) will begin reducing interest rates during its September meeting.
Despite Fed Chair Jerome Powell’s semi-annual Congressional testimony on Tuesday, where he refrained from outlining a specific rate-cut plan for this year, market sentiment remains optimistic about a rate cut. Powell emphasized the need to maintain current interest rates until there is clear evidence that inflation will return to the desired 2% rate.
Unexpectedly, Powell acknowledged that the US economy is no longer overheated, citing cooling job market conditions and a labor market that has moderated to pre-pandemic levels. This shift in economic conditions has led to increased expectations of a Fed rate cut in September. Investors will closely monitor the US Consumer Price Index (CPI) report for June, scheduled for release on Thursday. The report is anticipated to show steady growth in core inflation by 0.2% monthly and 3.4% annually. The annual headline inflation is projected to have slowed to 3.1% from May’s 3.3%, with the monthly figure barely changing.
Should inflation remain high, expectations for a September rate cut may ease, whereas soft inflation numbers would bolster them.
Daily Digest Market Movers: Pound Sterling Holds Gains Ahead of UK GDP/US CPI
The Pound Sterling continues to perform strongly against its major peers, bolstered by several factors. The British currency has gained strength following the outright victory of the Keir Starmer-led Labour Party in parliamentary elections, which has brought political stability to the UK economy. However, uncertainty over the Bank of England (BoE) rate-cut path persists following hawkish comments from BoE policymaker Jonathan Haskel.
On Monday, Haskel, a prominent hawk, ruled out a rate cut in August, citing persistent high inflation in the labor market due to strong wage growth. Haskel stated, “I would rather hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably,” according to Reuters.
In contrast, financial markets currently expect the BoE to begin cutting its key rates from the August meeting, driven by the return of annual headline inflation to the bank’s 2% target.
Investors are now turning their attention to the monthly Gross Domestic Product (GDP) and factory data for May, due on Thursday. Economists predict a 0.2% expansion in the economy after a flat performance in April. Industrial and Manufacturing Production are also expected to have grown on a monthly and annual basis following declines in April.
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