British Pound drops to weekly lows below 1.3600 as US Dollar gathers momentum

GBP/USD reaches session lows at 1.3570 and is 0.5% down from Wednesday's high.
The US Dollar gathers some momentum as hot US inflation adds pressure on the Fed to hike interest rates.
ING strategists think that the Fed will stand pat in September, which will hurt demand for the USD.

Guillermo Alcala FXStreet

The British Pound (GBP) extends losses for the second consecutive day on Thursday, as the US Dollar (USD) strengthens after the hot US inflation report released on Wednesday. The GBP/USD pair is trading at one-week lows at 1.3675 heading into the US session, opening more than 0.5% below Wednesday’s highs, in the mid-1.3600s.

US data released on Wednesday revealed that the Personal Consumption Expenditures (PCE) Price Index accelerated beyond expectations in July, with the yearly rate remaining steady at 3.7% against expectations of a mild decline. Likewise, core PCE inflation grew at a steady 3.3%, in both cases well above the Federal Reserve’s 2% target rate.

Markets await clearer Fed signals on September FOMC

These figures add pressure on the central bank to hike interest rates in the coming months, although bets for a September hike have remained unchanged at 36%, according to data by the CME’s FedWatch Tool.

Strategists at ING describe yesterday’s US data releases as “a mixed bag, offering some support to the dollar but failing to solve the market's conundrum about the September FOMC (pricing now 9bp).”

Against that backdrop, ING says they “remain reasonably confident in our call for the Fed to hold on 16 September and, by extension, in a weaker dollar.” However, the bank cautions that “the next three weeks may need to bring a more convincing combination of data and Fedspeak before markets move closer to a hold outcome,” underscoring that current pricing still leaves room for hike expectations to shift.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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