PoundSterlingLIVE - Pound Sterling risks breaking to fresh three-month lows against the Dollar if U.S. inflation beats expectations later today, but recent history suggests the U.S. currency tends to weaken following inflation releases.
Due for release at 13:30 BST, U.S. inflation is expected to grow 3.6% year-on-year, with core tipped by economists to rise 4.3% y/y.
Should these figures be exceeded then the GBP/USD exchange rate would likely break below the regional support at 1.2440-1.2450 amidst a broader USD rally as investors raise the odds of a September rate hike and lower expectations for the scale of interest rate cuts likely in 2024.
"The release of the US CPI for August is expected to reveal a pick-up in headline inflation," says Lee Hardman, Senior Currency analyst at MUFG Ltd.
But Hardman says there would have to be a significant upside for inflation today to alter market expectations for the Federal Reserve's upcoming September decision, which sees markets overwhelmingly expecting rates to be kept on hold.
Of more interest will be what happens in 2024 when the Fed is expected to cut interest rates, a development that is widely tipped by analysts to weigh on the Greenback.
MUFG notes market pricing for the scale of cuts in 2024 has already been reduced owing to rising oil prices which are anticipated to rejuvenate inflationary trends.
Recent history meanwhile reveals the Dollar does tend to retreat in the immediate aftermath of inflation releases.
"Looking at price action around CPI report releases this year, the dollar index has weakened in the first 30 minutes after releases following the last six CPI reports," notes Hardman.
The Pound-Dollar rate could recover recently lost ground if the foreign exchange market respects the recent playbook, particularly if the figures undershoot expectations.
"While headline inflation is forecast higher, the core component, more relevant for next Wednesday’s FOMC meeting, is expected to drop. Barring upside surprises from data, the dollar should weaken," says Asmara Jamaleh, an economist at Intesa Sanpaolo (BIT:ISP) Bank.
An original version of this article can be viewed at Pound Sterling Live