- The Pound Sterling edges higher but remains below the crucial resistance of 1.3100 against the US Dollar (USD) in Tuesday’s European session. The GBP/USD pair gains slightly, but its near-term outlook remains uncertain as the US Dollar holds Monday’s gains.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains near 101.60, with investors focusing on the United States (US) Consumer Price Index (CPI) data for August, which will be published on Wednesday.
- Though the Fed is almost certain to start reducing interest rates this month, the inflation data will influence market speculation for the likely interest rate cut size. According to the CME FedWatch tool, the possibility for the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% in September is 29%, while the rest favors a 25-bps interest rate cut.
- The likelihood of a Fed's large interest rate cut has somewhat declined since the release of the US Nonfarm Payrolls (NFP) data for August on Friday, which indicated that the slowdown in the job growth was not as bad as it appeared in the July data.
- Meanwhile, economists estimate the annual headline US CPI to have decelerated to 2.6%, the lowest since March 2021, from July’s reading of 2.9%. The core inflation – which excludes volatile food and energy prices – is expected to have grown steadily by 3.2%. Both monthly headline and core inflation are projected to have risen 0.2%.
- Softer-than-expected US inflation data would prompt market expectations for the Fed to begin the policy-easing process aggressively. On the contrary, sticky or hot CPI figures would weaken them.
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