GBP Eyes Move Beyond $1.35 as Cooling US Inflation Weighs on the Greenback

The Pound (GBP) staged a convincing recovery against the US Dollar (USD) in the second half of last week, driven by a shock deterioration in US employment data that hammered Federal Reserve rate hike expectations.

This improvement allowed GBP/USD to rise above $1.35, up approximately 0.2% over the week at the time of writing, but analysts warn that weaker UK growth may limit Sterling's upside.

The 'Greenback' initially strengthened last week due to better-than-expected ISM manufacturing PMI, but this recovery proved short-lived as USD demand faded amid fresh hopes for a US-Iran ceasefire and a larger-than-expected fall in US job openings in June.

The Pound struggled to establish a clear direction last week due to a sparse UK economic calendar, leaving investors looking overseas for direction. However, the publication of the latest US consumer price index is expected to show US price pressures continuing to cool, which could further reduce expectations for Federal Reserve policy tightening and place additional pressure on the USD.

A softer inflation reading may allow GBP/USD to consolidate above $1.35, but a sharper-than-expected slowdown in UK economic growth could weaken expectations for another Bank of England interest rate hike later this year and limit Sterling's ability to capitalise on further US Dollar weakness.