Transatlantic Interest Rate Debate Dominates the Pound, GBP/USD Jumps

September 19, 2024 - Written by David Woodsmith

STORY LINK Transatlantic Interest Rate Debate Dominates the Pound, GBP/USD Jumps

The British Pound (GBP) posted gains after the latest UK inflation data with a Bank of England rate cuts seen as even less likely this week.

The Pound to Dollar (GBP/USD) exchange rate touched 1.3200 from 1.3160.

The Federal Reserve will cut rates today, although the size of the cut is still uncertain and there will be high volatility later in the session.

According to ING; “The pound is trading on the front foot after CPI data and may find a bit more support tomorrow. That said, the FOMC event today may be a bigger event for GBP markets. A 25bp cut can send GBP/USD back below 1.3100, but if Powell is as dovish as we expect, Cable may well find good support before touching the recent 1.3015 lows.”

Danske Bank added; “We maintain a bullish USD view heading into this week's FOMC, as we believe there is little economic incentive for the Fed to begin the rate-cutting cycle with a 50bp cut.”

According to MUFG, however, GBP is likely to advance further if there is a positive risk response to the FOMC tonight.

The headline UK inflation rate held at 2.2% for August and in line with consensus forecasts.

The core rate increased to 3.6% from 3.3% previously and slightly above market expectations of 3.5%.

The goods inflation rate dipped to -0.9% from -0.6% in July, but there was a significant increase in the services-sector rate to 5.6% from 5.2% in July.

Fuel and restaurant prices declined on the month, but this was offset by higher airfares.

The services-sector reading is likely to rattle the Monetary Policy Committee and markets priced in a 75% chance that rates will be held at 5.0% compared with around 65% ahead of the data.

According to Capital Economics chief UK economist Ruth Gregory; “We continue to assume the next 25 basis point rate interest rate cut will take place in November and that rates will be cut at alternative BoE meetings until June.”

The Federal Reserve will cut interest rates at today’s policy meeting but, unusually, there is a high degree of uncertainty over the decision.

During the current cycle, the Fed has been very reluctant to surprise markets and has been keen to align market expectations with the actual decision.

This time, however, there is a split in expectations with markets pricing in just over a 60% chance of a 50 basis-point rate cut with just under a 40% chance of a 25 basis-point move.

This set-up will inevitably trigger a sharp move across asset classes following the decision.

According to MUFG; “Our call remains that the FOMC will cut by 50bps tonight with a guidance and message that implies the FOMC is taking out some degree of insurance.”

Updated forecasts will also be important with markets inevitably focussing on the ‘dot plots’ of interest rate forecasts by individual committee members.

Guidance from Chair Powell will also be a key element for markets.

ING expects a smaller cut and commented; “A 25bp cut will likely lead to a dollar rally. However, if we are right with our expectations of a dovish press conference by Powell, the dollar may well struggle to hold on to gains beyond the very short-term.”

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TAGS: Pound Dollar Forecasts