Inflation came in lower for the UK, and now the Fed and BoE will determine the next path for the exchange rate.
GBPUSD – Daily Chart
GBPUSD has fallen to 1.2368, with support below at the 1.2319 level. The pair will look to test that with the volatility of two central bank meetings.
Wednesday will bring the Federal Reserve’s latest interest rate decision, with investors expecting a pause. That will be followed by the Bank of England tomorrow, where investors were expecting another rate hike.
Inflation in the UK dropped to 6.7% in the year to August in a surprise fall, according to official figures on Wednesday. Economists had predicted the Consumer Price Index (CPI) inflation to increase to 7.1% due to rising fuel prices.
The reading comes before the Bank of England’s decision tomorrow, with experts now unsure if the bank will raise its rate by 0.25 percentage points to 5.5%. The European Central Bank raised interest rates by 0.25 to 4% last week but hinted it was done with its run of interest rate hikes.
Economists had expected an increase from the BoE on Thursday due to “exceptionally strong” wage growth data. But Wednesday’s inflation figure could mean the chance of another rate hike is lower.
Charles Goodhart, a former member of the MPC, told the Independent that the inflation data put the decision “on a knife edge” and added, “My guess is these figures might just tip it over into a pause.”
Ken Wattret, at S&P Global Markets, said markets now expect a “50-50” chance of another hike, saying, “All things considered, we still think it more likely than not that rates will rise again, but the latest inflation data suggest it’s certainly not the slam-dunk it looked a short while ago”.
