Pound Sterling rises amid uncertainty over BoE rate-cut timing.

The Pound Sterling struggles to extend gains against the US Dollar as investors shift focus to the US core PCE Inflation.
Investors expect that the BoE will start reducing key rates in August.
Investors will focus on the US core PCE inflation data for May this week.

The Pound Sterling (GBP) performs relatively stronger against its peers in Tuesday’s New York session. The British currency remains upbeat amid uncertainty about when the Bank of England (BoE) will start cutting interest rates.

Market expectations indicate that the BoE will announce a cut in interest rates in August, the first one since the Covid-19 pandemic hit. Speculation for BoE rate cuts in August has strengthened as policymakers signaled in the latest policy meeting that they are closer to starting to roll back their restrictive interest rate stance.

BoE Governor Andrew Bailey said in the monetary policy statement that the decision to keep interest rates unchanged at 5.25% in the last meeting was “finely balanced”. Seven officials voted to keep key rates steady while policymakers Swati Dhingra and Deputy Governor Dave Ramsden voted for a rate cut.

The BoE said the return of the annual headline inflation to the bank’s target of 2% is welcome news. However, it is still not enough for rate cuts. BoE policymakers remain worried about stubborn wage inflation, which is posing upside risks to price pressures in the service sector.

Daily digest market movers: Pound Sterling remains firm against majority of its peers

The upside in the Pound Sterling against the US Dollar (USD) appears to have stalled around the round-level resistance of 1.2700. Earlier, the GBP/USD pair recovered from a five-week low of 1.2620 as the US Dollar (USD) corrected due to firm speculation that the Federal Reserve (Fed) will start cutting interest rates from the September meeting. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, drops to 105.40 from a seven-week high of 105.90.
According to the CME FedWatch tool, 30-day Federal Funds Futures pricing data indicates that there will be two rate cuts and the central bank will lower borrowing rates subsequently in the November or December meeting.
Contrary to market expectations, Fed officials expect only one rate-cut this year as they say they want to see inflation declining for months before pivoting to policy normalization. In an interview with CNBC on Monday, Chicago Fed Bank President Austan Goolsbee said that he is “very optimistic” about a further improvement in the inflation data, which will open room for potential rate cuts.
Going forward, investors will focus on the core US core Personal Consumption Expenditure price index (PCE) for May, which will be published on Friday. The core PCE price index data is the Fed’s preferred inflation measure, and it is expected to provide fresh cues on when the central bank will start reducing interest rates this year. Soft figures would boost expectations of the Fed to begin easing borrowing rates from September, while hot numbers will likely delay any rate cuts towards the end of the year.