GBP/USD Eyes $1.35 as Softer US Data Fades Fed Hike Bets

The pound traded near $1.3498 against the dollar Thursday, little changed, as softer US producer prices and fading bets on a September Federal Reserve hike offset resilient UK growth data. Sterling found little support from second-quarter GDP, which rose 0.4 percent, slowing from 0.6 percent in the first quarter, with part of the expansion tied to World Cup and warm-weather seasonal factors.

"Talk is emerging that President Trump could be trying to launch a cut in the Capital Gains Tax ahead of the midterms in early November. That would prove a mild dollar negative from a pro-risk perspective," ING said in a note, adding that more debt could push long-end Treasury yields higher.

US factory-gate inflation stalled in July rather than rising 0.2 percent, the latest sign that price pressures are cooling beyond the energy spike. Headline CPI eased to 3.4 percent from 3.5 percent, with core inflation at 2.5 percent, while energy prices fell 1.5 percent on the month and gasoline dropped 2.9 percent. Shelter costs rose 0.1 percent and accounted for about two-thirds of the overall monthly gain, while food prices were up a modest 0.1 percent.

The data trimmed the odds of a 25-basis-point hike at the Fed's September 15-16 meeting to roughly 42-45 percent, with futures pricing a 55-58 percent chance of a hold from the current 3.50-3.75 percent range. The fed funds rate has been unchanged since the July meeting, when three policymakers dissented in favor of a hike.

Softer Data Could Push GBP/USD Past $1.35

Friday's US retail sales report and University of Michigan consumer sentiment gauge are the next test. Economists expect retail sales growth to slow to 0.1 percent in July from 0.2 percent in June, while confidence is forecast to deteriorate. A weak print would further reduce expectations for another hike, pressuring the dollar and lifting GBP/USD back above $1.35.

The dollar index slipped 0.1 percent after the CPI release, while S&P 500 futures held gains near 0.5 percent and Nasdaq 100 futures rose about 1 percent. Treasury yields eased as rate-hike expectations cooled. The euro held near $1.1524 and the yen traded at 159.35 per dollar, both little changed, as the softer inflation print failed to trigger a broader dollar selloff. The July jobs report, which showed a 23,000 drop in payrolls, had already softened the case for tightening.

Fed Chair Kevin Warsh has stressed the need to restore price stability after inflation stayed above target for years. The in-line CPI gives neither hawks nor doves decisive ammunition, leaving September a close call. Energy markets remain volatile because of the Middle East conflict, and any rebound in oil could push inflation higher again in the months ahead.

On the UK side, economists cautioned that growth could weaken in the second half of the year. Persistent inflation and the Middle East conflict could create further headwinds, keeping a lid on sterling gains even as the dollar softens.

For GBP/USD, the path hinges on whether the dollar's recent strength holds. Middle East tensions continue to support safe-haven demand for the greenback, which could limit sterling gains even if US data disappoints. If the Fed holds through year-end, the dollar could drift lower, giving the pound room to test $1.35 and beyond.

This article is for informational purposes only and does not constitute investment advice.