GBP/USD loses further ground after hot US CPI inflation print rocks rate cut bets
- GBP/USD backslid again on Tuesday after US CPI clocked rising price pressures.
- The Pound Sterling is down nearly 3% against the Greenback in July.
GBP/USD shed another two-thirds of one percent top-to-bottom on Tuesday, extending into an eighth consecutive day of Cable losses. The US Dollar (USD) caught a risk-off bid after US Consumer Price Index (CPI) inflation rose through June, reigniting fears of another pushback on the Federal Reserve's expected pace of rate cuts through the year-end.
US CPI up, rate cut hopes down
US CPI inflation crept up through the end of the second quarter. Even though the numbers mostly met or beat expectations, investors still feel the pinch from rising prices. In June, the annualized headline CPI inflation rate increased to 2.7% year-over-year, drifting away from the Fed’s target range of 2%. With inflation still lingering, hopes for an early rate cut from the Fed have faded.
According to the CME’s FedWatch Tool, traders now fully expect the Fed to hold rates steady at the July meeting. Expectations for a September rate cut also diminished after the CPI release, with a 44% chance of rates remaining unchanged. However, markets are still optimistic about two rate cuts in 2025, with an 80% chance of at least a quarter-point reduction in October with a follow-up rate trim expected in December.
GBP/USD daily chart
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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