Pound sterling is set for its best monthly performance against the U.S. dollar this year, fueled by expectations that the Bank of England may keep interest rates “higher for longer” due to persistent inflation.
Data on Friday revealed that UK house prices rose in May after two months of declines.
The dollar fell after data that indicated U.S. inflation rose in line with expectations in April, positioning the currency for its first monthly decline in 2024.
The personal consumption expenditures (PCE) price index — the Federal Reserve’s preferred measure of inflation — increased by 0.3% last month, according to the U.S. Commerce Department's Bureau of Economic Analysis, matching the unrevised gain reported in March.
The U.S. dollar index was last down 0.248%, at 104.51.
Sterling was down 0.11% at $1.2748 on Friday but is still poised for a 1.6% rise in May, marking its largest monthly increase since November's 3.9% gain. Sterling reached a two-month high of $1.2801 on Monday and has since fluctuated to a low of around $1.268. Analysts believe any further declines should remain relatively limited.
Traders anticipate one rate cut from the Bank of England this year, with uncertainty surrounding the possibility of a second. Interest-rate futures indicate approximately 32.5 basis points of cuts priced in by December, down from just over 50 basis points a week ago.
Investors often monitor sterling's performance against the euro for a clearer indication of sentiment towards the UK economy and its markets.
The euro saw its largest daily jump against sterling on Friday since early May, following data showing eurozone inflation rose more than expected, just days before the European Central Bank is anticipated to implement a rate cut.
The EUR to GBP rate was last up 0.27% at 85.31 pence but remains on track for a third consecutive monthly decline against sterling and a yearly drop of 1.6%.
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