GBP/USD Rate Destined for sub-1.30 as US Inflation Data Prompts Massive Slump

The GBP/USD looks destined to break below the key 1.30 level over coming days with the USD likely to remain supported by growing expectations that a September interest rate hike would be delivered by the US Federal Reserve.

Since peaking at 1.3445 on September 6th the Pound has been in reverse against the US Dollar with the pair slipping down to 1.30.

A sharp decline was delivered on Friday 16th September after the release of data which showed shop prices in the United States are rising faster than economists had expected. 

Rising inflation tends to be supportive of currencies, and so it was for the Dollar.

US core CPI rose 0.3% on a monthly basis in August, economists had forecast 0.2% growth.

While this may appear small, it is a bit deal as annual core CPI now stands at 2.3%.

Markets are buying the Dollar as a bet that the final major data release ahead of the US Fed’s September decision may sway the Board of Governors towards an interest rate rise.

The GBP to USD exchange rate fell by a percent in the face of a broad-based Dollar rally and is holding just above 1.30.

Pound Sterling was therefore the second-worst performing currency of the week in the G10 arena, after the Canadian Dollar, on the back of this performance

The EUR to USD exchange rate has fallen sharply too, by 0.63% and is now trading at 1.1158.

The US Dollar index - a broad-based measure of the USD across global foreign exchange markets - was up at 99.09.

“While other economic indicators have disappointed recently, August CPI inflation bucked the trend and gave Fed hawks some support in their battle to raise interest rates,” says Royce Mendes at CIBC.

Despite the strong rise, Mendes does not anticipate a September interest rate rise on the back of this data and prefers December for the month in which the Fed acts.

Indeed there is now a +- 20% probability of a hike according to September Fed Fund futures. 

So while September is not a shoo-in, there's a very strong chance that Janet Yellen will set the stage for tightening in December at the September meeting.

"While headline inflation remains stuck around 1%, core inflation is comfortably above the Fed’s target. Nevertheless, the data are unlikely to change the Fed’s decision next week. After overall somewhat weaker data in the last few weeks, the Fed is unlikely to hike rates in September," says Piet Lammens at KBC Markets.

There could therefore be the chance that markets have over-egged the Dollar on this one set of data.