Yesterday, the GBP experienced a surprising turnaround as anticipation built for this morning's CPI numbers, with markets now betting on a potential rate cut by the Bank of England (BoE) this Thursday.
USD was weaker at the start of the day but finished broadly higher after retail sales grew 0.1% month-on-month versus an expected fall of 0.2%.
*Daily move - against G10 rates at 7:30am, 18.09.24
** Indicative rates - interbank rates at 7:30am, 18.09.24
Today's burning question: Will the Fed opt for a 25bps or 50bps rate cut? Market odds currently see a 60% chance of 50bps whilst most economists can only see 25bps. The Fed's biggest dilemma seems to be whether a 50bps will prompt fears of an impending recession in the US economy?
Additionally, the other key focus will be on the Fed's revised dot plot projections. Market pricing is currently forecasting US interest rates of around 2.75% by the end of 2025; and June’s dot plot projections saw rates at 3.25% - a 50bps differential.
A lower revision by the Fed could put USD under further pressure in the short term. But we have to remember that the market is already very dovish on the Fed so there is a possibility that big losses on the currency could be limited. There is an argument that suggests that USD is more sensitive to hawkish data and commentary in the medium term.
UK CPI numbers this morning all came in line with projections and thus there is minimal impact on BoE rate projections. As a result, GBP is higher, erasing yesterday's nervousness, and remains in a good position to be well supported in the near term with a drop in risk sentiment being the only risk for further gains.
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