– Written by
Frank Davies
STORY LINK GBP/USD Price Forecast: Higher UK Inflation Fails to Lift Pound Ahead of Fed
The Pound US Dollar (GBP/USD) exchange rate remained close to a five-week low on Wednesday, with the latest UK inflation figures doing little to lift Sterling ahead of the Federal Reserve’s interest rate decision.
At the time of writing, GBP/USD was trading at around $1.3470, close to recent lows.
US Dollar (USD) Holds Firm Ahead of Fed Decision
The US Dollar (USD) remained well supported on Wednesday as investors awaited the Federal Reserve’s latest policy announcement.
Markets are overwhelmingly expecting policymakers to raise interest rates by 25 basis points, taking the federal funds target range to 3.75%-4.00%.
Persistent US inflation, elevated oil prices and resilient economic activity have strengthened the case for tighter policy, with markets pricing a greater than 90% probability of a hike.
Attention will therefore focus less on the decision itself and more on Federal Reserve Chair Kevin Warsh’s guidance and the central bank’s updated economic projections.
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A hawkish message signalling that further rate increases could follow later this year may provide the Dollar with additional support.
Conversely, if Warsh characterises the move as a limited adjustment rather than the start of a sustained tightening cycle, the ‘Greenback’ could struggle to extend its recent gains.
Pound (GBP) Struggles despite Higher UK Inflation
The Pound (GBP) remained subdued after UK consumer price inflation accelerated from 2.9% to 3.1% in August, reaching a five-month high.
The increase was driven primarily by higher energy costs, petrol prices and airfares.
However, the underlying figures were less concerning for the Bank of England.
Core inflation held at 2.6% for a fourth consecutive month, while services inflation remained unchanged at 3.4%.
The relatively benign underlying readings reduced the likelihood of an immediate BoE rate hike despite the increase in headline inflation.
Tuesday’s employment figures had also pointed to a softer domestic backdrop.
The unemployment rate held at 4.9% in the three months to July, while vacancies fell again and regular wage growth slowed to 3.5%.
The combination of weaker labour demand and contained underlying inflation leaves the Bank of England widely expected to keep interest rates unchanged on Thursday.
GBP/USD Exchange Rate Outlook: Fed Guidance Takes Centre Stage
Looking ahead, the Federal Reserve decision will provide the immediate catalyst for GBP/USD.
A 25-basis-point increase is already largely reflected in market pricing, meaning Sterling’s reaction may depend primarily on the tone of Kevin Warsh’s press conference and the Fed’s updated rate projections.
A signal that policymakers expect another hike before the end of the year could push the Dollar higher and place renewed pressure on GBP/USD.
A more cautious message would increase the risk of a Dollar correction and could allow the Pound to recover towards $1.35.
Attention will then turn to Thursday’s Bank of England announcement.
Markets see only around a 20% chance of an immediate BoE rate hike, although further tightening before year-end remains heavily priced.
If the Bank emphasises the stability in core and services inflation alongside the weakening labour market, Sterling could remain under pressure.
However, stronger warnings over the inflationary impact of elevated energy prices would keep expectations of future BoE tightening alive and potentially offer the Pound some support.
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TAGS: Pound Dollar Forecasts
