The British Pound (GBP) fell against the Euro (EUR) and the U.S. Dollar (USD) on Wednesday, September 20, 2023, following a sudden decline in the U.K.'s CPI inflation to 6.7% in August, from 6.8% in July. This unexpected drop has led to a re-evaluation of market expectations regarding future rate hikes by the Bank of England (BoE), said Nikesh Sawjani, Senior U.K. Economist at Lloyds (LON:LLOY) Bank.
The decrease in inflation is largely attributed to unusual price shifts between July and August, possibly influenced by factors like the timing of price collection and school holidays. These factors caused significant price drops in sectors like airfares and hotel accommodations. Despite these trends, there is anticipation of the BoE leaning towards a 25 basis point increase in interest rates, pushing it to 5.50%.
This potential move would mark the 15th consecutive rise, justified by ongoing inflation rates that significantly overshoot the target and persistently high wage growth. However, unanimity within the BoE's decision-makers seems unlikely with speculations about dissenting opinions among rate-setters.
In addition to rate deliberations, the BoE's Monetary Policy Committee (MPC) will announce its strategy regarding asset sales for the upcoming year, starting October. Indications suggest a potential acceleration in these sales.
Meanwhile, on Thursday, September 21, 2023, U.S. jobless claims are set to take center stage. On Wednesday, Federal Reserve Chair Powell announced that further policy moves will be data-dependent. A modest increase in U.S. jobless claims would align with the FOMC economic projections for unemployment and the Fed rate path.
The Federal Reserve's hawkish hold on Wednesday evening resulted in further losses for the Pound to Dollar exchange rate, taking the pair to levels not seen since last April. The GBP/USD trajectory now largely depends on the BoE's decision, which could potentially risk a prolonged U.K. recession and hasten a BoE interest rate cut.
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