The Pound Sterling is seeing a downside against the US Dollar due to an increased focus on US inflation by investors. Despite this, UK job growth has remained strong in the three months leading up to July. Although UK wage growth is expected to slow down, it could prompt potential interest rate cuts by the Bank of England (BoE) later this month.
The British currency has shown strength against other major peers aside from the US Dollar and Canadian Dollar during Tuesday’s New York trading session. The UK Office for National Statistics (ONS) reported a robust labor demand, while wage growth has eased as expected. The increase in new workers hired by UK employers has historically been seen as bullish for the BoE, but the slowing wage growth could mitigate those expectations.
BoE policymakers have been concerned about inflation, particularly in the services sector, making a slowdown in wage growth a welcome relief. This could increase speculation in the market for potential interest rate cuts by the BoE. Average Earnings Excluding Bonuses came in as expected at 5.1%, marking a two-year low, while wage growth including bonuses decelerated faster than anticipated.
Investors will now turn their attention to the UK monthly Gross Domestic Product (GDP) and factory data for July, which are set to be released on Wednesday. The Pound Sterling has shown strength against the Canadian Dollar, with varying performance against other major currencies during the day.
Although the Fed is likely to start reducing interest rates this month, the upcoming US inflation data will impact market speculation on the size of the interest rate cut. The US Dollar has risen against the Pound Sterling, with investors closely watching the Consumer Price Index (CPI) data for August. The possibility of a 50-basis-point interest rate cut by the Fed in September is at 29%, with the remaining favoring a 25-bps cut.
Soft US inflation data could prompt a more aggressive easing policy by the Fed, while strong figures could delay expectations of rate cuts. The Pound Sterling has failed to recover above the 1.3100 resistance level against the US Dollar, hovering near trendlines and key support levels.
Monetary policy decisions in the US are made by the Federal Reserve (Fed) to achieve price stability and full employment. Adjusting interest rates is a primary tool used by the Fed, influencing the strength of the US Dollar. The Fed conducts policy meetings where decisions are made based on economic conditions, with Quantitative Easing (QE) being a non-standard policy measure used in crises or low-inflation scenarios. Quantitative Tightening (QT) is the opposite process, which can strengthen the US Dollar.
