The Pound US Dollar (GBP/USD) exchange rate fell on Tuesday, following news that UK inflationary pressures are continuing to ease.
At the time of writing, GBP/USD traded at around US$1.2678, a fall of just under 0.3% from Tuesday’s opening rates.
The Pound (GBP) came under pressure during Tuesday’s trade, following news that UK shop inflation has continued to cool.
In January, shop price inflation slowed to 2.9%, the lowest level since May 2022, and a notable deceleration from December’s level of 4.3%.
Helen Dickinson, Chief Executive of the British Retail Consortium, commented: ‘Some New Year cheer as January shop price inflation slid to its lowest level since May 2022. Non-food goods drove the fall, as many retailers offered heavily discounted goods in their January sales to entice consumer spend amidst weak demand.’
This served to spark renewed bets that the Bank of England (BoE) may open the door to interest rate cuts at its next meeting on Thursday.
The US Dollar (USD) traded in a muted capacity during Tuesday’s session, as investors looked ahead to the imminent interest rate decision from the Federal Reserve.
While markets anticipate the Fed to keep interest rates unchanged, questions remain over how open to interest rate cuts the central bank currently is. Inflation has shown signs of continuing to cool in America, while the employment market and economy remain relatively robust.
Because of this, the expectation is that the Fed may begin to loosen its monetary policy sooner rather than later, and may even be the first central bank to begin cutting rates. However, not all analysts agree with this perspective, and are anticipating firm pushback from the Fed.
Analysts at ING commented: ‘A March interest rate cut looked too soon to us given strong growth and the tight jobs market, so the recent Fed official commentary downplaying the chances of an imminent move hasn’t come as a surprise. Markets are now pricing just a 50% chance of such a move with nothing priced for the 31 January FOMC.’
Additionally, the US Dollar saw quiet trade as markets anticipated the latest JOLTs job openings data. As recent data has shown that the US labour market remains robust, any sign of slack in hiring may have kept investors at the sideline.
The core catalyst of movement for the Pound this week is set to be the latest interest rate decision from the Bank of England.
On Thursday, the BoE is widely expected to keep interest rates unchanged, but to accompany this with a pushback against interest rate cut bets. If the BoE proves successful, the Pound may rally as markets unwind these expectations.
However, if the bank is unconvincing, or even opens the door to loosening its monetary policy, Sterling could struggle to attract support from investors.
Looking ahead for the US Dollar, beyond the Fed’s interest rate decision, Wednesday brings the release of the latest ADP employment change reading, reflecting levels in January.
On a monthly basis, the figure is expected to fall from 164,000 to 145,000. This would show a fall in the number of hirings within the US private sector, which may suggest signs of growing weakness in the US labour market.
This could, in turn, pressure the US Dollar as it may prompt interest rate cut bets amongst investors as the Fed will likely wish to avoid a hard economic landing.
This is followed on Thursday by the latest ISM manufacturing PMI. The sector is expected by economists to have slowed in January, with the index falling from 47.4 to 47. If the sector is weakening further, USD exchange rates could slip.
