Sterling holds gains as Fed Chair Powell strikes cautious tone on labor market

GBP/USD moved higher in early London trading on Wednesday after a modest pullback from a near four-week high of 1.2850 this week. The broad appeal of the exchange rate remains strong amid strong speculation that the Federal Reserve (Fed) will begin cutting interest rates during its September meeting.

The odds of the Fed moving toward policy normalization remain high, despite Fed Chairman Jerome Powell reiterating in his semi-annual congressional testimony on Tuesday that no specific path for rate cuts would be provided this year. Powell advocated for maintaining current interest rates for a long time until there is evidence that inflation will return to the desired level of 2%.

Fed Chairman Powell’s comments to Congress were unexpected in that he acknowledged that the US economy is no longer overheating and that job market conditions have cooled. Powell said the labor market has eased to pre-pandemic levels.

Now, the risks have become two-sided and a Fed rate cut in September seems a foregone conclusion. Investors will be watching the US Consumer Price Index (CPI) report for June, due out on Thursday, for more information. The report is expected to show core inflation, which excludes volatile food and energy items, rising steadily by 0.2% month-over-month and 3.4% year-over-year, respectively. Annual headline inflation is expected to slow to 3.1% from 3.3% in May, while the monthly rate is expected to barely rise after remaining unchanged.

If price pressures remain stagnant or hot, it would ease expectations of a rate cut in September. Conversely, weak data would boost expectations of a rate cut.

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