Pound falls against dollar after US inflation data

The British pound fell to $1.28, nearing a three-week low, as a stronger-than-expected U.S. CPI report boosted the dollar and reinforced expectations that the Federal Reserve will delay rate cuts.

Pound falls against dollar after US inflation data

U.S. inflation rose 0.5% in January, surpassing forecasts and fueling speculation that the Fed will maintain its hawkish stance for longer, leading to higher Treasury yields and strengthening the greenback. In the UK, markets adjusted their rate cut expectations after Bank of England policymaker Catherine Mann clarified that her previous vote for a 50 basis point cut should not be interpreted as a signal for aggressive easing. As a result, traders now anticipate around 62 basis points of cuts in 2025, reflecting a more cautious outlook on monetary policy adjustments.

Attention turns to UK data

Domestically, investors are closely watching key UK economic data, including GDP and industrial output figures set to be released later in the week. Preliminary estimates suggest the UK economy may have contracted in the fourth quarter of 2024, raising the possibility of a technical recession. The prospect of economic stagnation has added pressure on Chancellor Rachel Reeves to deliver on her promises of boosting growth and stabilizing public finances.

Concerns over weak consumer spending

Additionally, concerns over weak consumer spending, sluggish business investment, and ongoing geopolitical uncertainties, including trade tensions with the European Union, have weighed on sentiment. A deteriorating economic outlook could prompt the Bank of England to adopt a more dovish stance later in the year, especially if inflation continues to ease and labor market conditions soften. Meanwhile, political uncertainty ahead of the next general election may also influence market movements, as investors assess potential fiscal policy shifts.