Pound sterling falls after encountering selling pressure near 1.2800 due to several tailwinds.

The Pound Sterling (GBP) falls to 1.2750 against the US Dollar (USD) in Wednesday’s London session, after reaching a new 10-week high of 1.2800 on Tuesday. The GBPUSD pair’s surge stops as the UK’s inflation forecast softens and the US Dollar (USD) recovers.

A weaker UK inflation outlook could push the BoE to begin undoing higher interest rates.

UK shop price inflation data from the British Retail Consortium (BRC) showed that prices of food and non-food Items eased sharply in May. Annual shop pricing adjustments in prominent retail establishments in the UK increased by 0.6%, the weakest rate since November 2021, compared to the previous reading of 0.8%. Food price inflation fell for the 13th consecutive month, at 3.2%, down from 3.4% in April. The organization stated that businesses are passing on the benefit of cheaper pricing to customers.

A weaker UK inflation outlook would raise expectations of rate cuts from the Bank of England (BoE), which has maintained a restrictive interest rate stance since December 2021. Investors believe that the BoE will use the August meeting as the earliest opportunity to begin the policy-normalization process.

Daily market movers: Pound Sterling falls as Fed keeps hawkish interest rate guidance.

The pound sterling falls to 1.2750 against the US dollar as market sentiment turns negative. The appeal of risk-perceived assets has grown questionable as investors anticipate that the Federal Reserve (Fed) will not begin lowering interest rates until the fourth quarter of the year. S&P 500 futures have fallen significantly in the Asian session, indicating a risk-off market mentality.

The US dollar has recovered amid uncertainties ahead of the US core PCE pricing index

The US Dollar Index (DXY), which tracks the Greenback’s value versus six major currencies, has recovered to 104.70.
Traders refunded their bets that the Fed will begin decreasing borrowing prices from present levels at its September meeting. The reason traders are unwinding their bets is that Fed policymakers want to see price pressures fall for several months before considering rate reduction.
The CME FedWatch Tool shows that the probability of interest rates falling from their current levels in September has decreased to 44%, down from 58% a week ago. On Tuesday, Minneapolis Fed President Neel Kashkari stated that the prospect of additional rate hikes is low but not ruled out. Kashkari highlighted that the Fed should wait for sufficient progress in disinflationary measures before cutting interest rates.
This week, investors will watch the core Personal Consumption Expenditure Price Index (PCE) data for April, which will be released on Friday, for new clues regarding the Federal Reserve’s interest rate forecast. The Fed’s preferred inflation metric is expected to have increased consistently on a monthly and yearly basis, by 0.3% and 2.8%, respectively. Steady inflation growth would increase the possibility of interest rates continuing at higher levels.