The GBP/USD experienced a significant drop following the release of inflation figures in the UK, extending its losses in the North American session and briefly touching the 20-day EMA below the 1.2900 level. However, soft economic data from the US led to a recovery above this level, with the current trading price at 1.2914, representing a loss of 0.93%.
The recently revealed key economic data in the UK provided some relief for the Bank of England (BoE), which had been facing pressure due to its inability to achieve price stability for British households. The inflation figures for June indicated that price pressures are easing, aligning with the trends in the US economy. The Consumer Price Index (CPI) came in at 7.9% YoY, lower than the expected 8.2%, and significantly below May's 8.7%. Meanwhile, the core CPI rose by 7.3% YoY, lower than May's 7.9%.
As a result of the data, expectations for a 50 bps tightening by the BoE decreased to 45% from being fully priced in since Monday. The swaps market now estimates 25 bps rate hikes in September and November, with Bank Rates expected to peak at 5.75%-6.00%. This repricing of rates in the UK caused the GBP/USD to plummet by nearly 1%, equivalent to more than 110 pips.
On the other side of the Atlantic, economic data from the United States showed that the housing market, while still recovering, experienced a slowdown. The latest data from the US Department of Commerce revealed an -8.0% MoM decline in Housing Starts, following an impressive 21.7% increase in May, the highest growth rate in 11 months. Building Permits also dropped by -3.7% compared to the previous month, contrasting with May's growth of 5.6%.
Speculators currently believe that the US Federal Reserve (Fed) is nearing the end of its rate-raising cycle, as the CME FedWatch Tool indicates a 99% probability of a 25 bps hike in July, but no further increases are expected. The first Fed rate cut is anticipated in March 2024.
Despite today's weakness, the GBP/USD might continue to trade with an upward bias, driven by the expectation that interest rates in the UK will remain higher than in the US. This could lead to further strength in the Pound Sterling (GBP) if recessionary concerns surrounding the UK economy subside. However, if the UK falls into a recession, the safe-haven status of the US dollar could weigh on the GBP/USD pair.
