British Pound strengthens against US Dollar as traders price out hawkish Fed bets

The British Pound (GBP) experienced a 0.35% increase, reaching a near 1.3533 against the US Dollar (USD) during the European trading session on Friday. This strength arose due to a decline in the US Dollar, as traders discounted the Federal Reserve (Fed) raising interest rates at their September meeting. At present, the US Dollar Index (DXY), which measures the Greenback’s worth compared to six major currencies, has declined by 0.23% to near 99.70.

The US Dollar was the weakest among major currencies against the New Zealand Dollar. The heat map illustrates the percentage changes of major currencies against each other. The CME FedWatch tool revealed that the likelihood of the Fed maintaining policy rates steady in September surged to around 65%, a significant shift from the 75% probability of two rate hikes a month ago.

This change in sentiment is linked to more subdued US Consumer Price Index (CPI) data for July, which eased expectations of hawkish Fed interest rate actions. Analysts from Commerzbank noted that the July US CPI was in line with expectations, indicating that while inflation remains elevated, it is not accelerating broadly. Consequently, the Fed funds futures adjusted their projections for a September rate hike, with markets now expecting a 40% chance of a 25 basis point increase compared to 52% on Monday, showcasing a modest yet significant shift in near-term Fed tightening expectations.