Pound Sterling Falters as Dollar Rebounds After US Inflation Data

The British pound weakened against the U.S. dollar on Thursday as traders rebuilt bullish dollar positions after this week's U.S. inflation data failed to significantly alter the outlook for Federal Reserve policy. The move overshadowed a U.K. economic report showing a slowdown in quarterly growth but a surprisingly strong monthly performance in June.

By 06:04 ET (10:04 GMT), the GBP/USD pair traded 0.01% lower at $1.3493. The pound's decline was primarily attributed to broad-based dollar strength rather than domestic economic news.

Dollar Rebounds Post-CPI

The dollar's recovery followed an initially negative reaction to U.S. inflation data that met economists' forecasts. The July Consumer Price Index (CPI) showed a 0.1% month-on-month rise in the headline figure and a 0.2% increase in the core reading. According to Francesco Pesole, an FX strategist at ING, the market's initial dip was due to a "small dovish repricing in Fed rate expectations," as traders had been positioned for a higher inflation print.

However, Pesole noted that the data "did not provide a conclusive answer for front-end rates and FX direction," leading the dollar to end the day stronger on what he described as "some net long rebuilding." This suggests investors bought back into the dollar after the brief post-CPI dip.

Fed Outlook and UK Economic Data

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Despite the in-line inflation, which Pesole noted was running at a soft 1.6% three-month annualized pace for the core metric, markets remain reluctant to price out further Fed rate hikes. The combined jobs and CPI reports only trimmed 5 basis points from September FOMC expectations, and a full 25-basis-point hike is still priced in for the December meeting.

In the U.K., gross domestic product (GDP) growth slowed to 0.4% in the second quarter from 0.6% in the first, a figure that matched consensus estimates. A standout detail was the monthly data for June, which showed output rising 0.3% against expectations for a decline, suggesting a stronger economic handoff into the third quarter than the headline figure implied.

Market Catalysts Ahead

Traders are now looking ahead to upcoming U.S. economic data, including Thursday's Producer Price Index (PPI) report, and next week's release of the FOMC meeting minutes for further clues on the Fed's path. The central bank's annual Jackson Hole Symposium, scheduled for August 27-29, is also seen as a major potential catalyst for currency markets.