On Friday, the British pound (GBP) dropped against the US dollar (USD), reaching a record low of 1.3408. This continued a slight downward trend observed throughout the week. Bank of England Governor Andrew Bailey seems to have abandoned the idea of raising interest rates in the near term, while US economic data is putting pressure on the Federal Reserve to consider tightening monetary policy.
Bailey mentioned at an economic conference in Reykjavík that “in some cases, we may allow inflation to temporarily exceed the target rate,” pointing out that economic activity and the labor market are influencing secondary effects. He also noted that the Bank of England had considerably tightened policy in response to recent shocks compared to what the market had anticipated, effectively ruling out potential rate cuts.
US-Iran ceasefire extension fuels mild risk appetite
Interestingly, on Friday, a moderate appetite for risk somewhat reduced the demand for the traditionally safe-haven US dollar, which helped to limit the pound’s decline. The announcement that the US and Iran have agreed on a memorandum of understanding to extend the ceasefire by another 60 days and ease some restrictions on maritime traffic in the Strait of Hormuz was viewed positively by the markets. However, this deal still awaits the signature of President Donald Trump.
In the US, newly released data indicated that the personal consumption expenditures (PCE) price index, the Federal Reserve’s main gauge of inflation, has surged to a three-year high. This trend is putting pressure on household incomes and economic activity.
These developments bolster the Fed’s hawkish tendencies and sustain anticipation for potential rate hikes. According to CME’s Fed Watch tool, there’s nearly a 50% likelihood of a rate increase by year’s end.
Contrarily, Minneapolis Fed President Neel Kashkari has tempered expectations for imminent monetary tightening. He cautioned that it might be premature to assume that the central bank would raise rates right after the release of April’s PCE inflation figures, adding that the ongoing situation in Iran complicates the inflation outlook.
