The pound fell slightly against the euro ahead of upcoming economic data releases and a much-anticipated speech by Bank of England Governor Andrew Bailey. The market’s cautious stance came as traders awaited new economic indicators that could shed light on the state of the UK economy. Governor Bailey’s speech will provide further insights into the central bank’s monetary policy outlook amid recent economic developments.
Sterling’s movement is crucial for investors, as it often reacts to macroeconomic news and policy announcements. The currency market’s attention is currently focused on inflation rates and growth data, which significantly affect the Bank of England’s decision-making process. In related news, Europe’s main stock markets and currencies rallied on Thursday due to increasing optimism about a potential peace deal between Ukraine and Russia.
This positive sentiment helped offset recent concerns caused by persistently high U.S. inflation data. GBP/USD gains ground as traders project annual UK GDP to expand in Q4 2024. BoE’s Catherine Mann expressed concerns over weakening demand in the United Kingdom.
US Inflation in January has reduced the likelihood of a dovish Fed stance for the June policy meeting. GBP/USD extends its winning streak for the third consecutive day, trading around 1.2460 during Thursday’s Asian session. Traders await the UK’s preliminary Gross Domestic Product (GDP) data due later in the day.
Cautious stance ahead of BoE speech
Economists expect a contraction in Q4 GDP, though the economy is projected to expand annually. The outlook for the British economy remains uncertain, with Bank of England (BoE) Monetary Policy Committee (MPC) member Catherine Mann expressing concerns over weakening demand in the United Kingdom (UK) and the need for accommodative financial conditions.
Earlier this week, Mann told the Financial Times (FT) that demand conditions are significantly weaker. She had also advocated for a larger interest rate cut in last week’s policy meeting, where the BoE unanimously agreed to lower rates by 25 basis points (bps). However, GBP/USD’s upside may be limited as persistent US inflation could strengthen expectations that the Federal Reserve (Fed) will maintain interest rates at 4.25%-4.50% for an extended period.
According to the CME FedWatch Tool, the probability of a Fed rate cut in June has dropped to nearly 30% following the latest inflation data. On Wednesday, the US Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 3.0% year-over-year in January, exceeding expectations of 2.9%. The core CPI, which excludes food and energy, increased to 3.3% from 3.2%, surpassing the forecast of 3.1%.
Every month, headline inflation jumped to 0.5% in January from 0.4% in December, while core CPI rose to 0.4% from 0.2% over the same period. Economists suggest that the upcoming GDP data will be crucial in determining the next steps for the BoE’s monetary policy. A stronger-than-expected reading could support the British Pound and provide further momentum for GBP/USD.
In conclusion, the GBP/USD pair remains buoyant as markets closely monitor UK GDP data and its implications for future monetary policy amid mixed signals from the UK and US economies.