The GBP/USD pair started Thursday’s trading session at 1.2693, driven by the strength of the dollar amid rising U.S. yields and diminished expectations of a rate cut by the Federal Reserve in September.
Recently, Fed officials have shown a cautious tone regarding inflation forecasts, prompting traders and investors to lower their expectations for a rate-cutting cycle this year.
Markets currently see a 50% chance that the Fed will maintain interest rates in September. In my opinion, the combination of the Fed’s cautious stance and strong U.S. economic data supports the dollar’s strength in the near to medium term.
I believe that investors will take further cues from the second estimate of U.S. GDP for Q1 2024, due today, which is expected to grow by 1.3%. If the report shows a stronger-than-expected reading, it could bolster the U.S. dollar’s strength and put pressure on the GBP/USD pair.
Additionally, markets will be watching the release of U.S. weekly initial jobless claims, the goods trade balance, and pending home sales later today. Federal Reserve officials Raphael Bostic, John Williams, and Lorie Logan are also scheduled to speak. These are all significant factors that could cause high price volatility in the short term.
I also believe that increasing expectations that the Bank of England (BoE) will begin cutting interest rates in its August meeting due to weak UK inflation forecasts are affecting the pound. The International Monetary Fund (IMF) has predicted two to three rate cuts from the BoE. In the absence of UK economic data, electoral expectations may influence the pound (GBP). Concerns about political uncertainty could weaken the pound and limit the pair’s upside in the near term.
Therefore, I think that softer inflation expectations in Britain will enhance the outlook for rate cuts by the BoE, which has maintained a tight monetary stance since December 2021. Current expectations are that the BoE will cut rates in the August meeting and announce the start of monetary easing. This could create a divergence between the BoE and the Fed, potentially causing a significant drop in the GBP/USD pair.
