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GBP/USD exchange rate to retreat as UK inflation slows?

Pound and Euro coins on a five-Pound note.

GBP/USD exchange rate trades near eight-week high amid absence of data

The pound US dollar (GBP/USD) exchange rate is trading in a narrow range this morning amid a scarcity of both UK and US economic data.

At the time of writing the GBP/USD exchange rate is trading at around $1.2605, virtually unchanged from this morning’s opening rate.

Pound (GBP) to slide following UK inflation?

The pound (GBP) is poised to sink this week, with the publication of the UK’s latest consumer price index later this week.

Wednesday’s CPI figures are forecast to report a sharp cooling of inflation last month after the UK’s energy price cap was lowered.

Headline inflation is predicted to have slowed from 3.2% to just 2.1% in April, just shy of the Bank of England’s (BoE) 2% target.

Core inflation is also forecast to have decelerated, albeit at a more modest pace, with forecasts underlying price growth will drop from 4.2% to 3.7%.

The slowdown in headline inflation could trigger dramatic movement in the Pound in the middle of this week, as this may cement expectations that the BoE will begin cutting interest rates from next month.

The odds of a June rate cut crept above 50% last week as the UK’s latest jibs report signalled the labour market is also cooling.

Fed comments to drive US dollar (USD) movement?

The US dollar (USD) is trading near multi-week lows against the majority of its peers this morning amid a recent rise in Federal Reserve interest rate cut speculation.

In the absence of any notable domestic data, USD investors likely be focused on a series of Fede speeches scheduled for the first half of this week, as they look to Fed policymakers for greater guidance regarding a potential rate cuts later in the year.

Recent signs of US disinflation last week served to stoke bets the Fed will deliver multiple interest rate cuts this year, starting with a likely cut in September.

This will lead into the publication of the minutes from the Fed’s latest policy meeting on Wednesday.

Following the bank’s surprisingly dovish turn early in the month, the FOMC minutes will be scrutinised by USD. If they highlight concerns over the impact that higher interest rates are having on the US economy this may drag on the US dollar.  

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