Sterling Approaches in European trade on Wednesday against a basket of major rivals, extending gains for the second day against the dollar and scaling a year high. It is about to trade above $1.3 for the first time in 2024 following inflation data. The recent inflationary pressures are impacting Bank of England policymakers, thereby reducing the likelihood of a UK interest rate cut in August.
The Price
The GBP/USD rose by 0.2% today to $1.2997, the highest since July 2023, with a session-low at $1.2966. This follows a 0.1% rise on Tuesday, resuming gains and stemming losses.
Inflation
Government data showed UK consumer prices rose by 2% year-on-year in June, above estimates of 1.9%. Core prices increased by 3.5% in June, exceeding estimates of 3.4%. Services prices surged by 5.7% in June, matching expectations. This data indicates persistent inflation risks in the UK, necessitating more aggressive measures.
UK Rates
Following the inflation data, the odds of a 0.25% BOE interest rate cut in August fell from 47% to just 25%. This decline reflects the increasing likelihood that the Bank of England will take more stringent measures to combat inflation.
US Rates
Conversely, the odds of Federal Reserve 0.25% interest rate cuts in September and November rose to 100% following less aggressive remarks by Fed Chair Jerome Powell. This divergence in monetary policy expectations between the UK and the US is influencing currency movements.
Interest Rate Gap
The current UK-US interest rate gap stands at 25 basis points in favor of the US, the lowest such pace since March 2022. It is likely this gap will completely disappear in September if the Fed proceeds with a 0.25% rate cut. This narrowing gap could further impact the GBP/USD pair and the broader currency market dynamics.
Conclusion
Sterling’s rise towards $1.3 underscores the significant impact of inflation data on currency markets. As the Bank of England faces mounting inflationary pressures, the likelihood of interest rate cuts diminishes, supporting the pound. Meanwhile, the Federal Reserve’s dovish stance is widening the monetary policy gap between the UK and the US, influencing exchange rates.
FAQs
Why is sterling approaching $1.3? Sterling Approaches $1.3 due to positive inflation data in the UK, which reduces the likelihood of interest rate cuts by the Bank of England.
How does inflation data affect currency values? Inflation data impacts currency values by influencing central bank policies. Higher inflation can lead to higher interest rates, which typically strengthen a currency.
What is the current UK-US interest rate gap? The current UK-US interest rate gap stands at 25 basis points in favor of the US, the lowest since March 2022.
How do central bank policies influence exchange rates? Central bank policies, such as interest rate changes, impact the attractiveness of a currency for investors. Higher interest rates generally lead to a stronger currency.
What are the implications of a narrowing interest rate gap? A narrowing interest rate gap can lead to currency adjustments as investors rebalance their portfolios based on expected returns from different currencies.