COMMENT-Sterling slides after hot PPI cuts its rate advantage

GBP/USD traded either side of flat, around 1.28, in early NorAm, after hitting a session high 1.2823 in Europe amid less-dovish BoE rate expectations, relative to the Fed, in 2024, but those assumptions were tempered after U.S. PPI came in hotter than forecast diminishing June and full year U.S. easing prospects.

The prevailing zeitgeist for FX trading has been heavily dependent on relative interest rates, and the recent yaw in rate expectations has boosted the dollar versus the low rate currencies but weighed on it versus higher yielding sterling.

With firm PPI data following higher CPI Tuesday, the post-Powell dovish narrative has completely reversed and interest rate futures are now pricing a 68% chance of a rate cut in June and -77bp by the Fed's December meeting. Prior to Powell's dovish congressional testimony last week, December 2024 cut expectation were around -80bp.

With Fed-BoE rate expectations converging, the pound may continue to lose some of its recent vigor, though pullbacks may be shallow as further out their respective futures strips U.S.-UK rates are projected to move on a parallel path.

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