British Pound edges lower towards 1.3400 as BoE Bailey buys time

Finance

British Pound edges lower towards 1.3400 as BoE Bailey buys time

The British Pound (GBP) drifts lower against the US Dollar (USD) on Friday, reaching session lows at 1.3408 so far, on track for a moderate weekly decline. Bank of England Governor Andrew Bailey has practically discarded any interest rate hike in the near future, while US data adds pressure on the Federal Reserve (Fed) to tighten its monetary policy.

Bailey affirmed at an economic meeting in Reykjavik that “there is a case for tolerating temporarily above target inflation,” and added that economic activity and the labour market are weighing on second-round effects. The BoE chied also stated that, having taken expected cuts off the table, the bank has already tightened policy considerably in response to the shock relative to what had been expected by markets.

US-Iran ceasefire extension fuels a mild appetite for risk

Sterling‘s downside attempts, however, remain limited, with a moderate risk appetite undermining demand for the safe-haven US Dollar on Friday. News that the US and Iran have reached a memorandum of understanding to extend the ceasefire for another 60 days and limit restrictions on sea traffic through the Strait of Hormuz has been celebrated by the market, although the agreement is still pending US President Donald Trump’s signature.

In the US, data released on Friday revealed that the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserves (Fed) inflation gauge of choice, accelerated to its highest levels in three years, adding strain to household incomes and economic activity.

These figures add to the case of Fed hawks and keep hopes of an interest rate hike alive. The CMEs Fed Watch Tool shows a nearly 50% chance of an interest rate hike before the end of the year.

Minneapolis Fed President Neel Kashkari, on the contrary, has cooled hopes of upcoming monetary tightening. Kashkhari warns that it is premature to conclude that the central bank will raise rates right away after Aprils PCE inflation data release, and added that the Iran war has clouded the inflation outlook.