The Pound Sterling (GBP) strengthened against most major currencies during Monday’s London session, except for the Australian Dollar (AUD) and the New Zealand Dollar (NZD). Investors’ attention is now firmly on the upcoming UK Employment data for the three months ending in June, as well as the Consumer Price Index (CPI) figures for July, which are set to be released on Tuesday and Wednesday, respectively.
The UK Employment report is expected to show a slight increase in the ILO Unemployment Rate, rising to 4.5% from the previous 4.4%. Additionally, market participants will closely watch the Average Earnings Excluding Bonuses data, a crucial indicator of wage growth, which has been a significant contributor to high inflation in the service sector. Wage growth is anticipated to slow down sharply to 4.6% from the prior reading of 5.7%, which could raise expectations for potential interest rate cuts by the Bank of England (BoE).
Despite the expected decline in wage growth, BoE’s Monetary Policy Committee (MPC) member Catherine Mann expressed concerns over persistent inflationary pressures. Speaking on the Financial Times’ Economics Show podcast during Monday’s Asian session, Mann warned that goods and services prices might continue to rise, and wage pressures could take years to subside. She highlighted the risks of inflation remaining above the bank’s 2% target, despite the recent return of annual headline inflation to that level.
Pound Sterling Gains as Focus Shifts to UK and US Inflation Data
During Monday’s European trading hours, the Pound Sterling edged higher against the US Dollar (USD), supported by steady market sentiment. The GBP/USD pair rose gradually, as the US Dollar Index (DXY), which measures the Greenback’s value against six major currencies, held steady above the 103.00 level.
Market sentiment remained cautiously optimistic, though volatility is expected to increase as the United States (US) CPI data for July, scheduled for release on Wednesday, looms. This inflation data will play a pivotal role in shaping market expectations regarding potential interest rate cuts by the Federal Reserve (Fed) later this year.
Economists forecast that both the monthly headline and core CPI, which excludes volatile food and energy prices, likely increased by 0.2%. The annual headline and core inflation rates are projected to have eased by 10 basis points to 2.9% and 3.2%, respectively.
According to the CME FedWatch tool, the 30-day Federal Funds futures indicate a 46.5% chance of a 50 basis point interest rate cut in September. This probability has significantly decreased from 85% recorded a week ago, suggesting that market fears of a potential recession, driven by weak US Employment data for July, may have been exaggerated.
Meanwhile, confidence among Fed policymakers that inflation is on track to return to the 2% target has grown. Speaking at the Kansas Bankers Association on Friday, Fed Governor Michelle Bowman stated, “If incoming data continues to show that inflation is moving sustainably toward our 2% goal, it will become appropriate to gradually lower the federal funds rate to prevent monetary policy from becoming overly restrictive on economic activity and employment.” She also emphasized the need for patience, warning against overreacting to any single data point.
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