Pound to Dollar FX Outlook: Fed Could Cut Ahead of the Bank of England

July 18, 2024 - Written by John Cameron

STORY LINK Pound to Dollar FX Outlook: Fed Could Cut Ahead of the Bank of England

Following further evidence of stubborn UK services-sector inflation, there were fresh doubts over an August Bank of England (BoE) rate cut in August while markets are increasingly confident that the Fed will cut rates in September.

The shift in expectations triggered fresh Pound gains with the Pound to Dollar (GBP/USD) exchange rate managing to break above 1.30 to a 12-month high at 1.3045.

Bank of America notes that GBP/USD has been in a secular downtrend since 2008, but a sustained break above 1.28-1.29 could change that narrative with a possible long-term target of 1.40.

It added; “A few weekly closes above the 200-week SMA would further confirm the trend change to an upward trajectory.”

The Pound to Euro (GBP/EUR) exchange rate held around 1.1915 and close to 11-month highs.

The latest UK inflation data recorded an unchanged headline rate at 2.0% compared with consensus forecasts of a small decline to 1.9%.

The underlying rate also held at 3.5% compared with expectations of a marginal decline to 3.4%.

Goods inflation remained negative while the services-sector rate held at 5.7%.

Michael Brown, senior research strategist at Pepperstone commented; "This morning's UK inflation figures will likely be of some concern to policymakers on the (Monetary Policy Committee), with continued signs of inflation remaining sticky within the UK economy."

He added; "Naturally, the figures cast doubt on the MPC delivering the first 25bp cut of the cycle at the August meeting."

According to MUFG; “It continues to highlight that services inflation remains sticky at an uncomfortably high level which could deter MPC members from voting for a rate cut as soon as at next month’s MPC meeting.”

MUFG added; “For the pound it at least removes one potential downside risk which could have derailed its current upward momentum.”

According to ING any rate cut now would have a more substantial impact; “Markets may also gradually price out an August move in the coming weeks, which would make a potential cut a very negative event for the pound.”

Markets remain confident that the Federal Reserve will cut interest rates at the September meeting with the chances of a 25 basis-point cut above 90% while markets also see a small chance of a 50 basis-point cut.

According to Kyle Rodda, senior financial market analyst at Capital.com; "Retail sales are solid, at least on a nominal basis, and consumer demand is strong. But the more important data is the inflation data, and that's telling the market that the Fed is in a position to cut fairly soon."

In comments on Tuesday, Fed Governor Kugler stated that it will be appropriate to ease later this year if conditions evolve favorably.

She added; “It may be appropriate to hold rates steady 'a little longer, but added; “If labor market cools too much, it will be appropriate to cut rates sooner rather than later.”

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TAGS: Pound Dollar Forecasts