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by The British pound dropped to $1.28 (GBP/USD), retreating from its three-week peak earlier this month. This decline follows the release of the UK’s latest inflation data, which has sparked speculation that the Bank of England (BoE) may consider a rate cut soon.
While annual inflation rose as expected, it came in at a modest 2.2%, falling short of the higher projections. This data has influenced market expectations, with many now betting on potential rate cuts as the BoE reassesses its stance.
GBPUSD Fundamental Analysis – 14-August-2024
Lower Services Inflation Signals Easing Pressures
A significant factor contributing to the changing outlook is the drop in services inflation, which fell to 5.2%. This figure represents the lowest level in two years and is notably below the BoE’s forecast of 5.6%.
The decline in services inflation, coupled with slower-than-expected core inflation, suggests that inflationary pressures may be easing more rapidly than previously thought.
This has led to increased speculation about the BoE’s next move, with the possibility of a rate cut becoming more likely.
Increased Odds for Future Rate Cuts
The latest inflation data have raised the probability of a 25 basis point rate cut in September to 47%, up from 36% before the data was released. Traders are now factoring in the likelihood of two more quarter-point reductions by the end of the year.
This shift in market sentiment reflects growing confidence that the BoE may take action to support the economy, especially if inflation continues to moderate.
Labor Market Surprises with Unexpected Strength
Despite concerns about the broader economy, the UK labor market has shown unexpected resilience. Recent data revealed that the unemployment rate fell to 4.2% in the three months leading up to June, defying expectations of an increase.
Additionally, although it moderated to 5.4% from 5.8%, wage growth remains slightly above the BoE’s forecast. This strength in the labor market adds a layer of complexity to the BoE’s decision-making process, as it balances the need to manage inflation with the desire to support employment.
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