Sterling drops amid downbeat market sentiment

The Pound Sterling has fallen against the US Dollar amid a dismal market mood, with investors seeing the Bank of England (BoE) delaying rate cuts. UK’s stable wage growth is limiting the slowdown in price pressures, while the US Dollar corrects despite the Fed’s stance towards keeping interest rates higher for a longer period. The GBP/USD is -0.13% down, trading at 1.2438 at the time of writing.

The US Dollar Index rises from 105.75, and near-term demand for the US Dollar remains intact as Federal Reserve policymakers emphasize the need for interest rates to remain higher for a longer period until inflation returns sustainably to the 2% target.

Expectations that the Bank of England will delay rate cuts until the November meeting rose as the UK inflation for March decelerated slower than expected. The labour market report for the quarter ending February showed that Average Earnings including bonuses grew steadily by 5.6%, higher than expectations of 5.5%.

For inflation to return to the 2% target, the annual wage growth excluding bonuses should be close to 3.5%. Higher wage growth feeds inflationary pressures as businesses pass on labor cost to end consumers and households with higher income ramp up overall demand in the economy.

The Pound Sterling falls from 1.2480, but persistence in the UK’s inflation data for March forced traders to price out expectations for the Bank of England pivoting to rate cuts in the September meeting. Investors expect that the last mile for inflation to return to the 2% target will be bumpy.

The Bank of England’s core inflation data, which strips off volatile food and energy prices, grew by 4.2% year-over-year in March, above the consensus of 4.1% but significantly decelerated from February’s reading of 4.5%.