British Pound catches bid as BoE hawk warns inflation is embedded

The British Pound surged by 0.40% on Tuesday as the U.S. Dollar retreated from multi-month highs, propelled by a cautious remark from a Bank of England member of the Monetary Policy Committee (MPC). The GBP/USD exchange rate was trading at 1.3281 at the time of reporting. Traders are now closely monitoring Governor Andrew Bailey's upcoming speech, expected on Thursday.

Meanwhile, a widening of the U.S. trade deficit weighed on the Greenback, while risk appetite remains high, negatively impacting the U.S. Dollar, as evidenced by the U.S. Dollar Index (DXY), which dipped 0.31% to 101.78.

In the Middle East, ongoing hostilities between Yemen forces and the Houthis resulted in sporadic gunfire as the Yemeni forces sought to reconquer Bab al-Mandab to restore vessel traffic in the Red Sea. The conflict contributed to a decline in energy prices, with West Texas Intermediate (WTI), the U.S. Oil benchmark, falling 0.59% to $88.75 per barrel.

On the economic front, the U.S. trade deficit expanded in August as imports surged to a record high, leading to record goods trade deficits with at least three countries, including Mexico. The data, amounting to a deficit of $-105.6 billion, fell short of the forecast of $-102 billion. Additionally, the labor market exhibited strength, with the ADP Employment Change 4-week average surging to 23.75K, up from 22.5K the previous week.

In the UK, the agenda was light, with the Bank of England's Catherine Mann stating that inflation has become embedded. Her remarks bolstered the Pound, and now traders are focusing on the Bank of England's Governor Andrew Bailey, whose speech is slated for Thursday. Market sentiment was influenced by the prolonged Middle East conflict and its ramifications on energy prices, which have elevated market expectations for a potential rate hike in November.