The Pound-Dollar rate could rebound if UK inflation boosts BoE rate expectations, although a hawkish Federal Reserve decision may strengthen the US Dollar.
The Pound US Dollar (GBP/USD) exchange rate languished near a five-week low on Tuesday as UK jobs data failed to boost Sterling amid a risk-off mood.
At the time of writing, GBP/USD was trading at $1.3485, down marginally on the day.
Pound to Dollar (GBP/USD): 1.347651 (-0.18%)
Dollar to Yen (USD/JPY): 155.07025 (+0.43%)
DAILY RECAP:
The US Dollar (USD) remained supported on Tuesday as a risk-off market mood boosted demand for the safe-haven currency.
Investors remained anxious about the crisis in the Middle East, amid escalating tensions between Saudi Arabia and Iran-backed militias in Iraq and Yemen.
In addition, expectations for an interest rate hike from the Federal Reserve on Wednesday continued to provide support.
The Pound (GBP) came under pressure on Tuesday as markets assessed the latest UK employment figures and their implications for the economy.
The data pointed to broadly stable conditions in the British labour market over the three months to July. Unemployment remained unchanged, defying forecasts for an increase, while wage growth matched market expectations.
However, the overall picture was less reassuring beneath the headline figures. Some economists highlighted weaker signs within the data, suggesting the labour market may not be as resilient as the top-line figures implied.
Sterling also faced headwinds from rising UK bond yields. There were growing concerns that higher government borrowing costs could increase the likelihood of tax rises and spending cuts, potentially placing further pressure on economic growth.
Near-Term GBP/USD Forecast: UK CPI and Fed Decision in Focus
Looking ahead, the UK’s latest consumer price index figures are due on Wednesday and could give the Pound a lift.
Markets are anticipating a pickup in inflation in August, with headline CPI expected to climb from 2.9% to 3.1%. Core inflation is also forecast to edge higher, rising from 2.6% to 2.7%.
A stronger inflation reading last month – before the recent surge in oil prices – could encourage markets to price in a sooner-than-expected interest rate hike from the Bank of England (BoE).
That said, a modest increase in inflation may not be enough to significantly alter expectations for the BoE’s interest rate decision on Thursday.
Meanwhile, a forecast recovery in US retail sales in August could support the US Dollar on Wednesday afternoon.
The key focus for USD investors will be the Federal Reserve’s rate decision. An expected rate hike could lift the ‘Greenback’.
However, with the move largely priced in, there is a chance that the Dollar falls in the wake of the announcement, particularly if policymakers sound cautious about the need for further hikes.
Our currency coverage draws on live market data, official economic releases and published bank research.
