Pound soars to $1,27 as dollar sinks further on rate cut expectations

Cable has hit $1.27 against the dollar for the first time since August as the dollar extends losses following hints from Federal Reserve members about potential rate cuts if inflation continues to fall.

November has been tough on the dollar index, seeing a more than 3% loss, making it the worst performance in a year. Simon Harvey, head of FX analysis at Monex Europe, mentioned, “Markets have been trying to predict what's next – from potential monetary easing to better conditions for risk assets and a weaker dollar – but it seems that momentum is fading.”

Short-term focus remains on the overall market sentiment. This month, the prevailing trend has leaned towards long positions in equities, gold, and bonds while shorting the dollar and as a result sterling has benefited.

The belief that the Federal Reserve’s rate increase cycle is wrapping up has put pressure on the greenback. U.S. rate futures show a roughly 25% chance that the Fed could start cutting rates from as early as March next year, escalating to nearly 45% by May, according to the CME FedWatch tool.

Traders are keeping a close eye on the U.S. core Personal Consumption Expenditures (PCE) price index for further confirmation of a slowdown in inflation within the U.S. economy.

The direction of the GBP/USD in the near future might hinge on Wednesday and Thursday’s U.S. data, particularly Friday’s PCE inflation report. These reports are expected to provide insights into both U.S. growth and policy. Any signs of cooling inflation would constrain the Fed's ability to raise rates, potentially benefitting the pound further.