Pound Sterling Rises Against US Dollar Amid Fed Rate Cut Speculation

The Pound Sterling (GBP) climbed near 1.2770 against the US Dollar (USD) during Monday’s North American trading session. This upward movement in the GBP/USD pair is fueled by escalating expectations that the Federal Reserve (Fed) will implement a rate cut in its upcoming monetary policy meeting on December 18.

Fed Rate Cut Bets Gain Momentum

Market sentiment suggests an 83% probability that the Fed will reduce its benchmark interest rates by 25 basis points to a range of 4.25%-4.50%, a significant increase from the 62% likelihood observed just a week ago, according to the CME FedWatch Tool. Despite these dovish expectations, the US Dollar Index (DXY) edged up to 106.20, indicating resilience amid shifting rate expectations.
The November Nonfarm Payrolls (NFP) report released last Friday bolstered rate-cut predictions. The data revealed 227,000 new jobs added, surpassing the forecasted 200,000. Meanwhile, the unemployment rate ticked up to 4.2%, as anticipated, and Average Hourly Earnings grew by 0.4% monthly and 4% annually, exceeding expectations.

Federal Reserve Governor Michelle Bowman, however, urged caution, emphasizing the need for gradual rate reductions given persistent inflationary pressures. This week, all eyes are on the upcoming US Consumer Price Index (CPI) data for November, set to release on Wednesday. Analysts predict headline inflation will rise to 2.7% from 2.6%, while core inflation is expected to remain steady at 3.3%.

Pound Sterling Benefits From UK Inflation Concerns

The Pound Sterling continues to display strength against major peers, barring Asia-Pacific currencies. Concerns over persistent inflation in the UK have reinforced expectations that the Bank of England (BoE) will adopt a measured approach to monetary easing.

BoE Monetary Policy Committee (MPC) member Megan Greene recently projected that the central bank would meet its 2% inflation target within three years. Governor Andrew Bailey expressed confidence in the ongoing disinflation process but acknowledged the need for further action to achieve price stability.
Meanwhile, labor market data reflects challenges for the UK economy. A report by the Recruitment and Employment Confederation (REC) and KPMG showed that demand for workers fell sharply following the UK Labour budget, which raised Employer’s National Insurance Contributions to 15%. Their index of demand for staff dropped to 43.9 in November, marking its lowest level since August 2020.

Pound Sterling’s performance continues to reflect a delicate balance between domestic inflation concerns and global monetary policy developments.

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