Sterling strengthened to a four-month high on Thursday after comments from Bank of England policymakers prompted markets to scale back bets of an August rate cut, while the dollar inched lower ahead of a U.S. inflation report later in the day.
The British pound advanced 0.12% to $1.2864, its highest level since early March, after BoE policymakers on Wednesday said price pressure remained persistent.
The timing of a rate cut was an “open question”, Chief Economist Huw Pill said, dealing a blow to bets of an easing cycle beginning in August.
Sticky inflation is causing the BoE to hesitate in putting the first rate cut “despite evidence that a high interest rate environment has heightened monetary conditions and also caused growth conditions to be more unfavourable”, said Jeff Ng, head of Asia macro strategy, SMBC.
“Near-term wise, it may mean that the pound will be somewhat more firm due to this potential delay in rate cuts,” Ng said, adding that while he still expects a rate cut in the current quarter, odds for the first cut to come in the fourth quarter are rising.
In the broader market, the dollar was on the back foot, with the Aussie trading 0.16% higher at $0.6758, after earlier hitting its strongest level since January at $0.6763.
The euro was up a whisker at $1.0836, while the dollar was flat at 104.91 against a basket of currencies .
U.S. inflation data is due later in the day, where expectations are for core inflation to have risen 0.2% on a monthly basis in June, putting the annual figure at 3.4%.
“The consensus is looking for a benign 0.2% lift in the core CPI. We think that may also be the case,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
“That outcome will obviously build confidence that the FOMC will be able to cut rates fairly soon, so I think a 0.2% (rise) may perhaps push the dollar a bit lower modestly if market pricing for a September (cut) increases.”
Markets are now pricing in a more than 70% chance of a rate cut from the Federal Reserve in September, compared with a near-even chance a month ago, according to the CME FedWatch tool.
Fed Chair Jerome Powell said on Wednesday the U.S. central bank will make interest rate decisions “when and as” they are needed, pushing back on a suggestion that a September rate cut could be seen as a political act ahead of the fall presidential election.
Elsewhere, the New Zealand dollar edged 0.2% higher to $0.6096, nursing some of its losses from the previous session when it fell 0.7% in the wake of the Reserve Bank of New Zealand’s dovish tilt in its monetary policy statement.
The yen was adrift, but continued to be pressured by stark interest rate differentials between the U.S. and Japan, and last stood at 161.67 per dollar, near a 38-year low.
Many Japanese private banks who met with the Bank of Japan (BOJ) on Tuesday called for the central bank to halve its monthly bond purchases by around 2026, two officials with direct knowledge of the deliberations told Reuters.
The BOJ is expected to lay out a plan on how to taper its huge bond buying at its upcoming policy meeting on July 30-31, as it works gradually towards policy normalisation.