British Pound Rises as Dollar Softens Ahead of U.S. Inflation Report

The British pound edged higher against a softer U.S. dollar on Monday, with trading activity muted by the U.S. Labor Day holiday. Investors are looking ahead to a pivotal U.S. inflation report later in the week, which is expected to heavily influence the Federal Reserve's upcoming interest rate decision.

Dollar Weakness Drives Sterling

The pound sterling rose 0.14% to $1.3535, while the euro also saw a modest gain, with EUR/USD adding 0.07% to 1.1622 as of 05:10 ET, according to Investing.com data. The dollar's weakness comes despite factors that would typically offer support, such as high energy prices and a recent strong U.S. jobs report.

Analysts at ING noted that the dollar's performance is currently more influenced by the strong performance of global equity markets. "The inverse correlation between global equities and the dollar seems to be the strongest right now," said Chris Turner, Global Head of Markets at ING, in a note cited by the source. He added that ING prefers to "back the themes of higher energy prices and an under-priced Fed giving some support to the dollar in the near term."

Focus on Fed Policy and U.S. Data

Market participants are primarily focused on the U.S. Consumer Price Index (CPI) report for August, scheduled for release on Friday. ING analysts forecast a month-on-month reading of 0.4% for headline inflation and 0.2% for the core figure. According to the bank, these figures could be enough to encourage the Federal Reserve toward a 25 basis-point interest rate cut at its September 16 meeting, a move markets are currently pricing with a 58% probability.

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Also on the U.S. economic calendar this week are Treasury auctions totaling $119 billion for three-, 10-, and 30-year bonds, which will be closely watched for signs of investor demand.

UK Domestic Picture Provides Little Impetus

In the UK, Chancellor John Healey delivered a speech on Monday stating the British economy is "turning a corner," citing six interest rate cuts since the 2024 election and stock markets hitting all-time highs. However, he also warned about the high cost of debt interest, attributing it to a legacy of past "political chaos."

Market analysts suggest the speech had a negligible impact on sterling's trajectory. ING's Chris Turner commented that it would be difficult for the chancellor to introduce significant new pro-growth measures, forecasting that the euro to sterling (EUR/GBP) exchange rate would likely remain in a tight range.