GBP/USD retreats on higher BoE rate cut expectations

The Pound Sterling is facing pressure near 1.2650 against the US Dollar in Tuesday’s early American session as the latter rebounds. The GBP/USD pair is trading at 1.2630, down -0.05% at the time of writing.

Investors expect the Bank of England (BoE) to be more dovish this year than previously anticipated, driven by lower-than-anticipated inflation data in January and February. The BoE said last week that the central bank is not at a point where interest rates can be reduced, but policymakers didn’t rule out the market’s view of two or three rate cuts this year.

BoE Catherine Mann changed her vote on rates due to consumers disciplining firms’ pricing, the changing dynamic in labor markets, and the financial market curve. She added that discretionary services inflation has softened in the last couple of months, and the market is pricing in too many cuts in interest rates.

This week, market sentiment will drive the Pound Sterling’s next move as the UK economic calendar is light. Investors will keenly focus on the United States core Personal Consumption Expenditure Price Index (PCE) data for February, which will be published on Good Friday.

The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, finds support near 104.16. The USD Index recovers even though expectations for the Fed cutting interest rates in the June policy meeting increase as policymakers still have faith that inflation is easing.

The Fed seems confident that underlying price pressures are easing, but hot US inflation in January and February suggested that the path toward achieving price stability could be bumpier than expected.

BoE Governor Andrew Bailey said in an interview with the Financial Times last week that market expectations for rate cuts this year are not unreasonable and delivered an optimistic tone on the economic prospects.

This week, trading volume is expected to be low due to Good Friday and the United Kingdom’s economic calendar has nothing much to offer. However, the US core PCE Inflation data for February will be in focus.