Pound to Dollar Exchange Rate Strengthens Amid Lower-than-Expected Inflation Figures

The Pound to Dollar exchange rate is poised to conclude the week on a solid note, benefiting from the release of a closely watched inflation indicator that fell short of expectations.

The Core Personal Consumption Expenditures (PCE) index, a key inflation measure for the Federal Reserve, showed a year-on-year reading of 2.9% in December. This marked a significant decline from November’s 3.2% and fell below the consensus forecast of 3.0%.

Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole, noted that the faster-than-expected drop in core PCE inflation in recent months has led markets to anticipate an aggressive easing cycle from the Federal Reserve. The sub-3.0% reading could prompt discussions about potential rate cuts in the near future.

In December, the PCE index saw a month-on-month increase of 0.17%, marking the sixth month in the last seven where monthly inflation matched or fell below the Fed’s 2% target. The six-month annualized reading stands at 1.9%, and the three-month annualized figure is 1.5%.

The response in the currency market was reflected in a softer Dollar following the release, indicating market expectations of the Fed becoming more comfortable with the idea of interest rate cuts, potentially delivering up to six cuts in 2024.

The Pound to Dollar exchange rate rose by a quarter of a percent, reaching 1.2756 and achieving a weekly advance of 0.40%.

While the Pound-Dollar trading conditions have been notably calm, with six consecutive weeks closing above 1.2695 but below 1.2750, potential challenges loom as the Federal Reserve and the Bank of England prepare to announce their latest policy decisions and guidance updates next week.

Both central banks are likely to emphasize that it is premature to discuss interest rate cuts while hinting at the possibility of such discussions in the near future. The market’s reaction to this messaging will influence the Pound-Dollar exchange rate, potentially leading to limited volatility or, as seen in Thursday’s ECB event, unexpected fluctuations if central bankers struggle to strike the right balance in guiding markets.