The GBP/USD pair has halted its three-day losing streak, trading around 1.3140 during Asian hours on Monday. The US Dollar (USD) is facing challenges due to improved market optimism and rising dovish expectations surrounding the US Federal Reserve (Fed).
July’s US Personal Consumption Expenditures (PCE) Index data has led traders to scale back expectations of an aggressive Fed rate cut in September. The PCE Price Index increased by 2.5% year-over-year in July, matching the previous reading but falling short of the estimated 2.6%. Similarly, the core PCE rose by 2.6% year-over-year in July, in line with the previous figure but slightly below the consensus forecast of 2.7%.
Market participants are now 70.0% anticipating at least a 25 basis point rate cut by the Fed at its September meeting, according to the CME FedWatch Tool. Traders will be closely watching the upcoming US employment figures, including the Nonfarm Payrolls (NFP) for August, to gain further insights into the potential size and pace of Fed rate cuts.
On the GBP front, the Bank of England (BoE) is expected to gradually reduce interest rates for the remainder of the year, which could support the Pound Sterling (GBP). BoE Governor Andrew Bailey has mentioned that the second-round effects of inflationary pressures would be less significant than expected. However, Bailey has cautioned against rushing into additional interest rate cuts, as reported by Reuters.
Analysis:
The GBP/USD pair has seen a turnaround in its recent performance due to improved risk sentiment and changing expectations regarding Fed rate cuts. The US Dollar’s challenges and the BoE’s stance on interest rates are key factors driving the currency pair’s movements.
Traders should keep an eye on upcoming economic data releases, particularly the US employment figures, to gauge the potential impact on Fed policy and currency movements. Understanding the influence of central bank decisions and economic indicators is crucial for making informed trading decisions in the forex market.