The Pound to US Dollar (GBP/USD) exchange rate weakened on Wednesday after UK inflation cooled by more than expected in June, reducing expectations for further Bank of England policy tightening, while the US Dollar remained underpinned by cautious market sentiment.
At the time of writing, GBP/USD was trading around $1.3374, slipping modestly as investors reacted to the softer UK inflation report.
DAILY RECAP:
The Pound (GBP) came under pressure after UK inflation slowed more than expected in June.
Official figures showed headline consumer price inflation eased to 2.6%, down from 2.8% in May and below forecasts for a 2.7% reading, as lower petrol and transport costs helped reduce price pressures. The softer inflation print reinforced expectations that the Bank of England is unlikely to tighten monetary policy in the near term.
The weaker inflation data overshadowed Tuesday’s stronger-than-expected labour market report, which had shown unemployment holding at 4.9% and employment increasing by 147,000.
Political uncertainty also continued to linger after Prime Minister Andy Burnham appointed John Healey as Chancellor, with investors continuing to assess the fiscal implications of the new government’s policy agenda.
Meanwhile, the US Dollar (USD) remained broadly supported as investors continued to favour the Greenback amid lingering geopolitical uncertainty and expectations that the Federal Reserve will maintain a relatively restrictive monetary policy.
Near-Term GBP/USD Forecast: Softer UK Inflation Shifts Focus to the Fed
The sharper-than-expected slowdown in UK inflation has strengthened expectations that the Bank of England can leave interest rates unchanged while assessing the outlook for inflation and economic growth.
Investors will now look to upcoming UK retail sales and PMI data to determine whether inflation is easing without a material slowdown in economic activity.
For the US Dollar, attention will remain focused on Federal Reserve policymakers and incoming US economic data for further clues on the interest rate outlook.
If US data continues to point to a resilient economy while UK inflation remains subdued, the US Dollar may retain the upper hand against Sterling in the near term.
