In the currency markets, the pound exhibited a steady performance on Tuesday as traders awaited crucial U.S. inflation data, seen as a key factor influencing the short-term trajectory of the dollar against other currencies.
Earlier in the day, UK data revealed that the growth of workers’ wages in the three months to September was slightly less robust, though still maintaining proximity to its record pace.
These figures are unlikely to alleviate the Bank of England’s concerns about inflationary pressures, and they did little to alter market expectations for a potential UK rate cut, projected earliest in June 2024.
With major central banks presumed to have concluded their interest rate hikes, attention has turned to when the first rate cuts might materialize.
In contrast to the impact of UK wage data, Tuesday’s U.S. inflation report is anticipated to wield more influence over the near-term outlook for sterling, shaping expectations and potentially providing a boost to the dollar or dampening its strength.
The jobs report lacks substantial elements to trigger significant FX or rates movements. Sterling is anticipated to maintain a limited trading range, leaning towards a firmer stance. Attention is directed towards the upcoming U.S. CPI this afternoon and UK CPI data tomorrow.
As of now, sterling has risen by 0.1% against the dollar at $1.2284 and remains flat against the euro at 87.11 pence.
Despite surrendering a portion of its gains this year, sterling, alongside the Swiss franc, is among the only two G10 currencies that have sustained positive territory against the dollar in 2023, with sterling up by approximately 1.6% and the Swiss franc by 2.5%.
Weekly data from the U.S. financial markets regulator indicates that speculators currently hold a modest short position in sterling, gradually reducing the largest long position seen in nine years over the past few months.
The upcoming UK consumer price index (CPI) report on Wednesday is anticipated to reveal a slowdown in inflation to an annual rate of 4.8% in October, marking the lowest in two years, compared to September’s 6.7%. The core rate is also expected to ease to 5.8% from 6.1%.
Over the past 22 months, the Bank of England has implemented a record interest rate hike of 5.15 percentage points. During this period, headline inflation peaked at 11% in October of the previous year and has gradually declined, primarily due to a subsiding impact from increases in energy and food costs.
Fiona Cincotta, Market Strategist at City Index, remarked on Wednesday’s CPI report, stating, “Cooler inflation could offset concerns about the hotter-than-forecast wage growth, which is at least trending in the right direction even if slower than expected.”
On Monday, the pound exhibited minimal reaction to UK Prime Minister Rishi Sunak’s cabinet reshuffle, which witnessed the return of former premier David Cameron as foreign minister and the dismissal of interior minister Suella Braverman.
