The pound held above $1.34 against the dollar as softer US inflation data prompted traders to scale back Federal Reserve rate expectations. Sterling's resilience persisted even as UK gilt yields climbed above 5%, with markets now pricing a higher probability of Fed cuts by year-end.
The pound held above $1.34 against the dollar on Wednesday as traders pared back Federal Reserve rate expectations after softer-than-expected US inflation data.
"For GBP and gilt markets, the identity of the next chancellor is far more significant" for UK assets, BNY said, as investors "are looking at binary outcomes with respect to a significant deviation from the November budget or the broad status quo."
Sterling traded at $1.3404, edging higher on the day, even as UK 10-year gilt yields climbed above 5% to seven-week highs. The dollar index slipped as markets repriced the Fed's policy path, with traders now assigning a higher probability to rate cuts before year-end.
The repricing marks a reversal from the hawkish dollar positioning that had built up in recent weeks. Traders will now focus on upcoming US retail sales and jobless claims data for further confirmation of the disinflation trend, with the Fed's next policy decision scheduled for late July.
The US inflation report showed price pressures moderating more than economists had forecast, reinforcing the case for the Fed to begin easing later this year. The data overshadowed concerns about UK fiscal stability, where incoming Prime Minister Andy Burnham is set to take office on July 20 with cabinet appointments watched closely by bond investors.
Higher gilt yields have historically supported sterling by attracting foreign capital, but the move above 5% has revived questions about the UK's fiscal outlook. ING said it "very much doubts the BoE will deliver on any of the BoE tightening priced in by the market," suggesting the pound's rate advantage over other currencies may narrow.
UK retail data added to the mixed picture, with the British Retail Consortium reporting like-for-like sales growth of 1.7% in June, down from 3.4% previously and below the 2.6% consensus forecast. BRC Chief Executive Helen Dickinson noted that while the heatwave boosted demand for seasonal goods, "gaming and big ticket sales struggled."
Markets are pricing in two BoE rate hikes this year, which would take rates to 4.25%, though ING expressed skepticism that the central bank would deliver. The next major test for the pair comes with UK GDP figures due later this week and the Fed decision on July 29.
This article is for informational purposes only and does not constitute investment advice.
