The Pound to Dollar rate edged higher on Wednesday, trading around $1.3404, as investors kept scaling back Federal Reserve rate expectations after softer US inflation data. Traders now put the odds of a hike this month at just 14%, down from over 40%, with UK GDP figures the next test for Sterling.
The Pound to Dollar (GBP/USD) exchange rate climbed above $1.34 on Wednesday, holding gains as investors pulled back their bets on further Federal Reserve tightening. At the time of writing, GBP/USD traded around $1.3404, up modestly on the day.
Softer US inflation drags on the Dollar
The US Dollar struggled to attract support through the start of Wednesday's European session, weighed down by Tuesday's consumer price index. A clear selling bias took hold after the figures showed US inflation slowed much faster than expected through June.
The print led investors to question whether the Fed will deliver a 25bps rate hike by the end of summer. The odds of a hike at the end of this month tumbled from over 40% to just 14%. Investors also positioned for more Dollar weakness ahead of the latest US producer price index, which was expected to point to easing factory gate inflation.
Sterling capped by rising gilt yields
The Pound held firm against the Dollar but stayed mostly rangebound against its other peers. With no notable UK data on the calendar, Sterling sentiment was undermined by an uptick in UK bond yields, with the 10-year gilts trading close to a two-month high. Rising borrowing costs remain a burden on the UK economy, and GBP investors fear they will pose a fiscal challenge for incoming Prime Minister Andy Burnham.
UK GDP the next catalyst
The next driver for GBP/USD will be Thursday's UK GDP release. Month-on-month growth is expected to have turned positive in May, with consensus estimates predicting a move from –0.1% to 0.1%. A rebound could underpin Sterling later in the session, though the Pound's upside may be capped if growth still looks uneven. The US also publishes retail sales on Thursday, where sales growth is forecast to have slowed sharply last month, which together with an expected rise in jobless claims could keep pressure on the Dollar.
Source: Exchange Rates UK
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