Pound soars as markets scale back BoE rate cut bets

What’s been happening?

The pound skyrocketed through the first two weeks of July, initially buoyed by Labour’s landslide victory in the UK general election. Sterling then extended its gains as two BoE policymakers suggested that the bank may not cut interest rates in August and UK GDP for May beat forecasts.

Conversely, the US dollar came under significant pressure as markets ramped up bets on a Federal Reserve rate cut in September. This came as many high-impact US data releases pointed to a softening economy, while US inflation also cooled more than expected.

Meanwhile, the French election drove most movement in the euro. The far-right National Rally (RN) came third, which initially boosted EUR. However, with the vote ending in a hung parliament, political uncertainty ultimately stifled the single currency’s potential.

What do you need to look out for?

Looking ahead, the pound could trim its gains this week amid high-impact data. Any signs of easing inflation and a cooling UK labour market could prompt fresh bets on an August rate cut from the BoE, thereby denting Sterling.

Towards the end of the month, economists expect the second-quarter US GDP figures to report a modest acceleration in growth, while the core PCE price index – the Fed’s preferred measure of inflation – is set to hold steady. Could a stronger economy and stalling inflation boost USD?

As for the euro, EUR investors will be focused on the European Central Bank’s (ECB) upcoming policy decision. While the bank is set to hold rates, any hints of future policy plans could infuse the euro with volatility.