The GBP/USD pair is trading weaker near 1.3125 during early European hours on Tuesday. The decline is driven by a stronger US Dollar (USD) as markets await significant US economic data. Later in the day, Bank of England (BoE) Deputy Governor Sarah Breeden will speak, and the US ISM Manufacturing Purchasing Managers Index (PMI) will be released.
Market sentiment is increasingly confident that the US Federal Reserve (Fed) will ease monetary policy in its upcoming September meeting. The CME FedWatch Tool shows a nearly 69% chance of a 25 basis point rate cut. Fed Chair Jerome Powell hinted at a policy adjustment at the Jackson Hole symposium last month, stating that “the time has come for policy to adjust.”
While a potential Fed rate cut could weigh on the Greenback in the short term, Rabobank analysts forecast four rate cuts between September and January, with a hold thereafter through 2025. The US Nonfarm Payrolls (NFP) report on Friday will be crucial for insights into the size and pace of Fed rate cuts, with expectations for 163,000 job additions in August and a slight drop in the unemployment rate to 4.2%.
Conversely, the BoE is not expected to implement a rate cut in September, though there is an 87.2% chance of a 25 basis point reduction in November. With no major UK economic data releases this week, movements in the GBP/USD will likely be driven by USD dynamics.
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