The British Pound (GBP) strengthened against the US Dollar (USD), with the GBP/USD pair climbing to near 1.3405 during the early Asian session on Wednesday. This move was driven by softer-than-expected US inflation data for June, which dampened expectations for further US Federal Reserve (Fed) policy tightening [1]. According to the US Bureau of Labor Statistics, the US Consumer Price Index (CPI) rose by 3.5% year-over-year in June, down from 4.2% in May and below the market expectation of 3.8%. On a monthly basis, the headline CPI declined by 0.4% in June, compared to a 0.5% increase in the previous month [1].
The core CPI, which excludes volatile food and energy prices, remained unchanged on a monthly basis and increased by 2.6% year-over-year, compared to a 2.9% rise in May and the market expectation of 2.8% [1]. These figures contributed to a weakening of the US Dollar, as traders reduced their bets on a July rate hike from the Fed. The probability of a July rate increase dropped to 16% from 42% on Monday, according to the CME FedWatch tool, while the chance of a rate hike this year decreased to 80% from 89% [1].
Despite the softer inflation data, Fed Chairman Kevin Warsh emphasized that the central bank has "no tolerance for persistently elevated inflation" and cautioned that the situation is not entirely resolved following the CPI report [1].
In contrast, expectations for Bank of England (BoE) interest-rate hikes increased after surging oil prices reignited inflation concerns. Markets are now fully pricing in a quarter-point BoE hike by September, with another hike anticipated before year-end, according to Bloomberg [1].
The release of the US June Producer Price Index (PPI) report is also in focus later in the day, which could further influence market sentiment and expectations for central bank policy [1].
CONCLUSION
Softer US inflation data has reduced expectations for imminent Fed rate hikes, weakening the US Dollar and boosting the British Pound above 1.3400. Meanwhile, rising oil prices have led markets to anticipate further Bank of England rate increases this year. The market remains attentive to upcoming US PPI data for additional direction.