Sterling approaches $1.3 after inflation data

Sterling rose in European trade on Wednesday against a basket of major rivals, extending gains for the second day against the dollar and scaling a year high, and about to trade above $1.3 for the first time in 2024 following inflation data. 

The data showcased the inflationary pressures on Bank of England policymakers, in turn hurting the odds of a UK interest rate cut in August.

The Price 

The GBP/USD rose 0.2% today to $1.2997, the highest since July 2023, with a session-low at $1.2966. 

The pound rose 0.1% on Tuesday, resuming gains and stemming losses. 

Inflation 

Government data showed UK consumer prices rose 2% y/y in June, above estimates of 1.9%. 

Core prices rose 3.5% in June, above estimates of 3.4%.

Services prices surged 5.7% in June, matching expectations. 

The data shows the risks of inflation remain persistent in the UK, in turn necessitating more aggressive measures. 

UK Rates

Following the data, the odds of a 0.25% BOE interest rate cut in August fell from 47% to just 25%. 

US Rates

On the other hand, the odds of Federal Reserve 0.25% interest rate cuts in September and November rose to 100% following less aggressive remarks by Fed Chair Jerome Powell. 

Interest Rate Gap

The current UK-US interest rate gap stands at 25 basis points in favor of the US, the lowest such pace since March 2022. 

It’s likely such a gap will completely disappear in September if the Fed indeed went ahead with a 0.25% rate cut.