Pound Sterling weakens amid caution ahead of Fed Powell’s speech

• The Pound Sterling faces selling pressure against the US Dollar as uncertainty ahead of Fed Powell’s dampens market sentiment.
• UK’s annual shop price inflation decelerated to its lowest since October 2021.
• The BoE may start cutting interest rates in August.

The Pound Sterling (GBP) retraces to 1.2620 against the US Dollar (USD) in Tuesday’s London session. The GBP/USD pair weakens as market participants turn risk-averse amid uncertainty ahead of Federal Reserve (Fed) Chair Jerome Powell’s speech at 13:30 GMT and the United States (US) Nonfarm Payrolls (NFP) data for June, scheduled on Friday. 

Powell is expected to provide cues about when the central bank will begin lowering its key borrowing rates. In June’s policy meeting, Powell said that the softening of inflationary pressures in May is encouraging, but policymakers want to see inflation decline for months before considering interest rate cuts. Officials projected only one rate cut this year as they lack evidence that inflation is on course to return to the desired rate of 2%.

This week, investors will pay close attention to the labor demand and the wage growth data, which will indicate whether the Fed should start reducing interest rates from the September meeting, as indicated by 30-day Federal Fund futures pricing data from the CME FedWatch tool.

In Tuesday’s session, investors will also focus on the US JOLTS Job Openings data for May, which will be published at 14:00 GMT. Economists expect the number of fresh job vacancies to be 7.90 million, slightly lower from 8.06 million in April.

Daily digest market movers: Pound Sterling falls on backfoot

• The Pound Sterling exhibits weakness against its major peers from North America, Europe, and the Japanese Yen (JPY) but is outperforming against Asia-Pacific currencies in Tuesday’s session. The British currency has come under pressure as easing United Kingdom (UK) price pressures have boosted expectations of early rate cuts by the Bank of England (BoE). 
• The British Retail Consortium (BRC) showed on Monday that the annual shop price inflation grew 0.2% in June, at the slowest pace since October 2021, decelerating significantly from May’s reading of 0.6%. The agency also reported that food inflation slowed straight for 14 months, declining to 2.5% from 3.2%, and prices for non-food items fell by 1.0% year-on-year, Reuters reported.
• It is worth noting that annual headline inflation, as measured by the Consumer Price Index (CPI), has already returned to the bank’s target of 2%. High inflation in the service sector continues to be a major concern for BoE officials. Policymakers see service inflation as the preferred gauge for price pressures and want it to decline significantly to gain confidence for pivoting to policy normalization.
• Currently, investors expect the BoE to start reducing interest rates at its upcoming meeting in August.
• Meanwhile, the revised estimates for the manufacturing sector showed that factory activities expanded modestly in June. The S&P Global/CIPS Manufacturing PMI report showed on Monday that the factory activity fell to 50.9 from the preliminary reading and the estimates of 51.4. However, it remained above the 50.0 threshold that separates expansion from contraction.