GBP/USD plunged below 1.2300 post US data amidst a buoyant USD
- The Pound Sterling continued to soften vs. the US Dollar ahead of the Fed’s decision.
- US inflation continues to grind lower as the Employment Cost Index drops.
- The International Monetary Fund expects the UK economy to hit a recession in 2023.
The Pound Sterling (GBP) extended its losses to three straight days against the US Dollar (USD), albeit a report from the Commerce Department showed that inflation continued to ease, incrementing expectations that US Federal Reserve’s (Fed) rate hikes would moderate. At the time of typing, the GBP/USD is trading at 1.2291.
US data slightly weakened the US Dollar, though it remains stronger than the GBP
Wall Street advances after employment costs data cooled down. The US Department of Labor (DoL) revealed that the Employment Cost Index (ECI) used by Fed officials as a measure of inflation in the labor market eased from 1.2% to 1% QoQ. Today’s data added to last week’s US Core Personal Consumer Expenditure (PCE), another inflation indicator used by the Fed, edged lower by the fourth straight month, from 4.7% YoY to 4.4%. All that said, speculations had mounted that the Fed will increase rates by 25 bps at its two-day meeting, which begins today and finishes on Wednesday when the US central bank releases its monetary policy statement.
In the meantime, the US Dollar Index, a measure of the American Dollar (USD) value versus its peers, has paired some of its losses and is up 0.08%, at 102.316, a tailwind for the GBP/USD.
Across the pond, the UK’s economic docket was absent. However, newswires reported that the International Monetary Fund (IMF) revealed that Britain’s economy would slide into a recession. The IMF foresees the economy to shrink 0.5% between the 2022 Q4 and the final quarter of 2023.
It should be said that the IMF updated its forecasts and expects the global economy to grow by 2.9% compared to its last projections of 2.7%, citing economic resilience and China’s reopening.
Given the backdrop, the GBP/USD would be greatly influenced by monetary policy decisions by the Federal Reserve and the Bank of England (BoE). On Wednesday, the Fed would be the first to act, while the BoE is estimated to raise rates by 50 basis points (bps), leaving the Bank Rate at 4%. Most analysts expect this would be the last increase by the BoE, which could lead to some Sterling weakness, as rates in the US are expected to peak at 5%.