- The pound sterling fell as traders flocked to the US dollar amid falling expectations of US rate cuts.
- According to forex trading platforms, GBP/USD fell to a two-month low of 1.2520 after stronger-than-expected US inflation data, which dampened expectations of a rate cut by the US Federal Reserve this year.
Overall, markets now expect approximately 50 basis points in total easing from the US Federal Reserve this year, compared to about 70 basis points of interest rate cuts in Britain. Last month, the Bank of England backed borrowing costs at a 16-year high of 5.25%, with two of its more hawkish members abandoning their calls for rate hikes and Governor Andrew Bailey hinting at possible rate cuts this year.
Now, the investors are awaiting the British monthly GDP figures scheduled to be released tomorrow, Friday, for more clarity on the bank’s policy path.
The US dollar rose after US inflation came in stronger than expected in March, pushing the probability of a June Fed rate cut below 50%. As a result, the pound's exchange rate against the dollar fell by more than two-thirds of a percent in a 15-minute window after news that US inflation rose 3.5% year-on-year in March from 3.2% in February, beating market expectations of a 3.4% print.
According to the economic calendar data, the core measure of inflation, which is more closely watched by the Fed, rose 3.8% year-on-year, unchanged from February and above expectations of 3.7%. According to the Bureau of Labor Statistics, the increase in inflation was primarily driven by rising energy prices and shelter costs. Furthermore, this is the latest set of monthly inflation figures to confirm that the disinflationary process underway in the US during 2023 has stalled and is now reversing, leading to fading chances of a June Fed rate cut.
As a result, the market has moved to price in a 50% chance of a move in June, with a total of around 70 basis points of cuts over the full year. The rise in US yields and the dollar confirm that the chances have been further reduced after this inflation reading. According to analysts, "Today's data suggests that the trend in core inflation is still much stronger than markets and Fed officials previously expected, implying that the shift to easier policy could be delayed by several months, at least."
Ali Jaffari, an economist at CIBC, says the data means that the risk of high and persistent core inflation is once again the Fed's top priority, even though inflation is not much above target. “The big question for the FOMC is what is behind this rise in inflation to start 2024. Powell seems to think that residual seasonality plays a big role and that still seems plausible. But it is also very difficult now to rule out risks to the Commission and demand in the economy is keeping service prices high with strong consumer spending and a job market that continues to give. Added, “This will keep the Fed waiting until the dust settles.”
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GBPUSD Expectations and Analysis Today:
The GBP/USD pair has now fallen, trading several levels below the 100-hour moving average line on the 60-minute chart. As a result, the currency pair fell to the oversold levels of the 14-hour RSI. In the near term, and according to the performance on the hourly chart, it appears that the GBP/USD pair has recently completed a downward breach from the formation of an ascending channel. Additionally, the 14-hour RSI appears to be supporting a short-term bearish bias after falling into oversold levels. Therefore, the bears will target an extended series of declines at around 1.2519 or lower at the 1.2485 support. On the other hand, the bulls will be looking to pounce on bounces at around 1.2564 or higher at 1.2585 resistance.
In the long term, and according to the performance on the daily chart, it appears that the GBP/USD pair is trading within a descending channel. Also, the 14-day RSI appears to be supporting a bearish bias after pulling back towards oversold conditions. Therefore, bears will target long-term profits at around 1.2448 or lower at 1.2366 support. On the other hand, the bulls will look to pounce on profits at around 1.2618 or higher at the 1.2700 resistance.
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