The GBP/USD currency pair hovered just above recent two-week low of 1.2667 on Wednesday, as market players awaited the outcome of the Federal Reserve and the Bank of England policy meetings.
Traders were also mulling the latest inflation figures that were reported by the United Kingdom.
Earlier today, the ONS data showed UK’s annual inflation had eased more than expected to 3.4% in February from 4% recorded in both January and December, while reinforcing the case for a BoE rate cut.
It has been the lowest rate since September 2021, driven by slower price increases for food and non-alcoholic beverages, restaurants and hotels, recreation and culture, as well as miscellaneous goods and services.
UK’s annual core CPI inflation, which excludes volatile categories such as food and energy, decelerated to 4.5% in February from 5.1% in each of the prior three months. It has been the lowest core inflation rate since January 2022.
The data came out a day before the BoE’s second policy meeting for this year.
The Bank of England is largely expected to keep its benchmark interest rate unchanged at a 16-year high of 5.25% for the fifth consecutive meeting in March.
In February, two Monetary Policy Committee members voted in favor of a 25 basis point rate hike, while one member voted in favor of a 25 bps cut.
The BoE said monetary policy would have to remain restrictive for long enough so that inflation is brought back down to its 2% target sustainably in the medium term.
Still, the central bank removed a reference to further policy tightening from its statement and noted the risks to inflation were more balanced.
Fed will likely keep rates at 23-year high
Meanwhile, the Federal Reserve is widely expected to leave its federal funds rate target range without change at a 23-year high of 5.25%-5.50% for the fifth straight policy meeting in March.
Federal Reserve Chair Jerome Powell had said that a rate cut in March was “not the base case.”
As inflation at both the consumer and producer level has shown signs of stickiness, investors tempered their expectations of the pace and scale of Fed rate cuts this year. This has provided support to the US Dollar over the past several trading days.
73 basis points of Fed rate cuts are now priced in, compared with 150 bps priced at the start of 2024.
Markets are now pricing in a 59% chance of the Federal Reserve cutting interest rates in June, according to the CME FedWatch tool.
“Given the recent rebound in inflation, the Fed decision will be closely scrutinised for whether there is a shift downwards in the median dot projection from 3 to 2 cuts this year,” Nicholas Chia, Asia macro strategist at Standard Chartered, was quoted as saying by Reuters.
“If that happens, I think Powell will try to strike a dovish note in his press conference to prevent a further bear steepening of the US curve.”
Currency Pair Performance
As of 9:52 GMT on Wednesday the GBP/USD currency pair was edging down 0.26% to trade at 1.2688.
Yesterday the major Forex pair went down as low as 1.2667. The latter has been the pair’s weakest level since March 4th (1.2646).
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