Sterling gains vs dollar ahead of US inflation data

LONDON (Reuters): The British pound edged up against the dollar on Thursday ahead of U.S. data that could reinforce the expectation that the Federal Reserve will soon start cutting interest rates, thereby giving sterling a greater competitive edge.

Sterling was last up 0.1% at $1.275. Against the euro , the pound was up 0.1% at 86.02 pence.

Bank of England Governor Andrew Bailey on Wednesday addressed lawmakers. He said he did not wish to discuss the economic outlook, but pointed to the decline in mortgage rates as markets have shifted to the view that the BoE’s benchmark rate will decline swiftly this year.

Futures markets show traders are close to pricing in four rate cuts this year, potentially as early as May, but definitely by June.

“The market is increasingly polarised about where rates are going to go. The only certainty is we will get rate cuts, the bigger question is when,” CMC Markets chief markets strategist Michael Hewson said.

“I also think that the bar is quite high based on the last meeting – you still have three members calling for rate hikes. You have got to look for them to do a complete reverse turn,” he said, referring to the three members of the Monetary Policy Committee that voted to raise UK rates in December.

The latest data shows the British economy shrank in October, raising the risk of recession.

This week, major retailers including grocery chains Tesco (TSCO.L) and Sainsbury’s (SBRY.L), are releasing the numbers for the all-important Christmas shopping period and so far, it has been a mixed bag.

The chief executive of Tesco, Britain’s biggest retailer, on Thursday said he was “cautiously optimistic” about the UK consumer in 2024, while rival Sainsbury’s reported bumper Christmas food sales, but weakness in demand for other key products.

UK shoppers have had to deal with borrowing costs at 15-year highs and a surge in inflation, but wage growth has been resilient.

Propped up by some of the highest interest rates among developed economies, the pound was one of the best-performing currencies against the dollar in 2023, with a gain of 5.2% – the most in six years.

Data later on Thursday is expected to show U.S. consumer inflation rose by 3.2% in December, versus November’s 3.1% rate, while the core rate is expected to have slowed to an annual pace of 3.8% from 4% the month before.

The dollar weakened broadly in the final weeks of 2023, based on the expectation that a drop in inflation and softness in parts of the economy such as manufacturing could justify a series of rate cuts early in 2024.

As a result, the pound is not far off late December’s 4-1/2-month highs against the dollar.