The British Pound (GBP) saw a positive shift against the US Dollar (USD) on Thursday, rebounding towards 1.3550 as the US dollar weakened following the release of mixed inflation data from the United States. The recovery follows earlier losses, with GBP/USD trading around 1.3540, reversing from intraday lows near 1.3493.
August’s Consumer Price Index (CPI) from the US revealed that headline inflation rose by 0.4% month-on-month, surpassing expectations of 0.3%, and showing an increase from July’s 0.2%. This uptick was primarily attributed to higher energy and shelter prices. On a year-over-year basis, headline CPI held steady at 2.9%, aligning with expectations but indicating a rise from the previous figure of 2.7%.
Conversely, the Core CPI, which excludes volatile food and energy prices and is closely monitored by the Federal Reserve, increased by 0.3% month-on-month and matched the 3.1% year-over-year figure, consistent with forecasts and previous month’s data. Despite the surprise in headline inflation, the stable core CPI has reinforced market expectations that the Fed will enact a 25 basis point rate cut at its upcoming monetary policy meeting.
Recent dovish signals from Federal Reserve officials, alongside softer labor market indicators and a disappointing Producer Price Index (PPI), have strengthened the case for policy easing. Market participants are now pricing in a 94% likelihood of a 25 basis point rate cut in September, up from 90% prior to the CPI release. Moreover, traders foresee three total cuts by the end of 2025, indicating a belief that the disinflation trend will continue.
Looking ahead, the focus now shifts to the Bank of England (BoE), which is set to announce its policy decision on September 18, one day after the Federal Reserve. The BoE is anticipated to maintain the Bank Rate at 4.00% after enacting five rate cuts earlier this year. This potential policy divergence, with the Fed likely easing while the BoE remains steadfast, could offer short-term support for GBP/USD, as narrowing interest rate differentials would benefit the British Pound.
In summary, the GBP has responded positively to US inflation data, with market sentiments leaning towards anticipated interest rate cuts in the US, while the UK maintains a cautious stance amid persistent wage growth.
