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Feb 05 - 11:55 AM

GBP/USD - COMMENT-Fed Chair Powell's Less-Dovish Outlook Sinks Sterling

By Paul Spirgel  —  Feb 05 - 10:05 AM

GBP/USD held near session lows in early NorAm, decidedly weak, as higher U.S. Treasury yields lifted the dollar broadly after comments overnight by Fed Chair Jerome Powell affirmed the U.S. central bank's more hawkish 2024 rate view of 3 Fed 25bp cuts in 2024, presenting difficulties for sterling.

Dovish market views recently peaked at 160bp of expected Fed easing this year.

But, recent data, most notably Friday's well-above forecast payrolls and wage data, indicated the Fed's success in reducing U.S. inflation may be stalling, causing the market to re-think vigorous rate-cut expectations for 2024.

The divergence between Fed and market expectations on rate cuts in 2024 became pronounced after headline inflation fell to 3% in June 2023.
Markets assumed the inflation would continue falling uninterrupted toward the Fed's 2% target.

However, data has not accommodated that view.
Headline inflation failed to break 3%, the June 2023 low-water mark, rising to 3.7% in August and September, and most recently coming in at 3.4% in December.

Powell now appears unwilling to risk a resurgence of inflation.

The current high-for-longer outlook is likely to continue to weigh on GBP/USD as the recent BoE hold had dovish elements which may further erode the UK's rate advantage.

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Refinitiv IFR Research/Market Commentary


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