GBP/USD rises to 12-week high on Fed rate peak conviction

The GBP/USD currency pair scaled a fresh 12-week peak on Monday, as market players awaited a host of macro data in the week ahead, including the Federal Reserve’s preferred measure of inflation, for further clues on future interest rate trajectory.

The Sterling extended last week’s 1.1% gain against the greenback after data showed British businesses had unexpectedly returned to growth in November following three months of contraction. This highlighted how resilient the British economy was despite the aggressive monetary policy tightening campaign by the Bank of England.

Meanwhile, investors were still focused on US interest rates, and more precisely, on the timing of the first rate cut by the Fed. The US Dollar extended losses, as traders seemed more convinced that US interest rates had already peaked.

Futures market data indicated an almost 23% chance that the Federal Reserve might begin reducing the federal funds rate as early as March 2024.

This week’s data on US Core PCE inflation may provide more clues in regard to future policy rates.

“Insofar as CPI inflation rates across much of the G10 are still above central bank targets, there is a strong incentive for policymakers to support the ‘higher for longer’ theme since higher market rates will help in the battle against inflation,” Jane Foley, senior Forex strategist at Rabobank, was quoted as saying by Reuters.

“Investors, however, are looking through this policy and appear increasingly pre-occupied about betting on the timing and pace of rate cuts next year.”

As of 8:37 GMT on Monday GBP/USD was edging up 0.16% to trade at 1.2614. Earlier in the session, the major Forex pair went up as high as 1.2627. The latter has been the pair’s strongest level since September 5th (1.2632).