Market Movements and Rate Expectations.

GBP: The Pound to Dollar (GBP/USD) exchange rate edged up to 1.2780 on Monday before stabilizing around 1.2770. Steady risk appetite supported the Pound. Meanwhile, the Pound to Euro (GBP/EUR) traded near 1.1685, well above last week’s 3-month lows of below 1.1600. Scotiabank views the trend for GBP/USD positively, stating that the recent price action is constructive for the Pound, with gains breaking the downtrend since mid-July. If the Pound surpasses the 1.2780/1.2810 resistance, it could extend its rebound to the upper 1.28s. Attention now shifts to key economic data, with the UK and US both releasing inflation figures on Wednesday. These reports will be crucial for shaping interest rate expectations and the Pound’s near-term direction. The UK inflation rate is expected to rise to 2.3% from 2.0%, with the core rate slightly decreasing to 3.4% from 3.5% last month. MUFG points out that markets anticipate a cautious approach from the Bank of England, with a more gradual rate-cutting cycle compared to the Fed and ECB. The UK market is pricing in around 100 basis points of cuts over the next year, compared to 175 basis points for the Fed and 125-150 basis points for the ECB. Weak data could lead to more dovish expectations from the BoE, potentially weakening the Pound.

• Pound’s Resilience: The GBP/USD exchange rate slightly increased, stabilizing around 1.2770, supported by steady risk appetite and a favorable trend outlook from Scotiabank, with potential for further gains if resistance is broken.
• Economic Data Focus: Upcoming UK and US inflation data are crucial for shaping interest rate expectations and the Pound’s direction, with UK inflation expected to rise and markets anticipating cautious rate cuts from the Bank of England.
• US Dollar Outlook: Core US inflation is forecasted to rise slightly, with shifting Federal Reserve rate cut expectations. The market is leaning towards a smaller 25 basis-point cut in September, impacting the USD and equity markets.
• Euro’s Stability: The GBP/EUR exchange rate remained steady at 1.1691, as the Pound struggled to gain momentum despite positive market sentiment and no significant UK releases.
• Investor Caution: Both the Pound and Euro faced subdued trading, with investors cautious ahead of key economic data and uncertain about aggressive bets on Sterling or Euro movements.

USD: Core inflation in the US is expected to rise by 0.2% month-on-month, with the annual rate slipping slightly to 3.2% from 3.3%. Recent shifts in Federal Reserve rate expectations have made a 25 basis-point cut in September more likely than a 50 basis-point cut. How the market reacts to the upcoming data will be pivotal. Scotiabank noted that if Fed expectations shift significantly, the USD might see a brief benefit, though equity markets could react negatively. If the Dollar strengthens and equities decline, GBP/USD could face substantial pressure. MUFG added that for the US market to expect a larger 50 basis-point cut, the core CPI would need to show weakness similar to June’s increase of just 0.1%. Without this, the US Dollar could regain some of its recent losses if aggressive Fed rate cut expectations are dialed back.

EUR: As of now, the GBP/EUR pair is trading at €1.1691, virtually unchanged from Monday’s opening rate. The Pound struggled to gain further ground on Monday, despite positive market sentiment and no significant UK releases. The absence of fresh data limited the impact of hawkish comments by Bank of England policymaker Catherine L. Mann. While Mann is usually hawkish, her comments were overshadowed by rising expectations of BoE rate cuts for the remainder of the year. She discussed wage dynamics, suggesting that the current structure could lead to wage increases next year. Despite this, upcoming UK data releases, including GDP and inflation figures, have left investors cautious, causing the Pound to trade without a clear direction. Meanwhile, the Euro remained subdued amid a lack of new Eurozone data, as global market risk sentiment favored other currencies over the traditionally safer Euro. As a result, the Euro was largely rangebound, losing ground against more risk-sensitive counterparts.