The Pound drew initial support on Thursday from stronger than expected UK GDP data and secured a further important boost as weaker than expected US inflation data triggered sharp dollar losses.
There was a further swing in interest rate expectations with increased expectations of a US rate cut and reduced chance of an August Bank of England (BoE) rate cut.
After an initial climb following the UK data, the Pound to Dollar (GBP/USD) exchange rate jumped to fresh 4-month highs at 1.2950.
The Pound to Euro (GBP/EUR) exchange rate also hit 4-week highs at 1.1885.
If risk appetite holds firm, GBP/USD will be in position to challenge the 1.3000 level.
Rabobank maintains a positive stance towards the Pound; “We expect that GBP will continue to edge higher in the months ahead on hopes that investment growth can recover from a very low base.
It does, however, expect GBP/EUR will benefit more than GBP/USD and noted; “That said, given the uncertainties connected with the US election and the risk of broad-based pullbacks in the USD, we prefer to express this view in EUR/GBP rather than cable.”
US consumer prices declined 0.1% for June compared with consensus forecasts of a 0.1% increase with the year-on-year inflation rate declining to 3.0% from 3.3% and compared with expectations of 3.1%.
Core prices increased 0.1% on the month, below expectations of 0.2%, with the annual rate retreating to 3.3% compared with expectations of an unchanged rate of 3.4%.
Following the data, markets moved to price in close to an 85% chance of a September rate cut and expects at least two cuts this year.
Earlier, the ONS reported that UK GDP grew 0.4% in May after no change in April and compared with consensus forecasts of a 0.2% increase.
Capital Economics economist Ashley Webb commented; “The improving economic outlook suggests the government may benefit from the economic recovery being stronger than most forecasters anticipate.”
Stronger growth would underpin Pound sentiment and there would also be the possibility of greater fiscal flexibility and a less pronounced squeeze on spending.
The data could also make the BoE more cautious over cutting interest rates.
Susannah Streeter, head of money and markets at Hargreaves Lansdown commented; “This could make Bank of England policymakers that bit more reticent about voting for an interest rate cut.”
She added; “”The possibility of a summer rate cut is fading, with a vote on 1 August expected to be on a knife-edge.”
According to Rob Wood, chief UK economist at Pantheon Macroeconomics, inflation will be more important for the central bank; “Rate-setters look desperate to ease policy and said in the minutes of their June meeting that they were unconcerned about stronger-than-expected growth.”
Nevertheless, he added; “Even so, this latest upside growth surprise supports our call that the MPC will wait until September to reduce Bank Rate.”
