Pound weaker against dollar ahead of UK GDP release

The pound traded in the red during early European hours on Thursday, as investors exercised caution ahead of the release of UK GDP data on Friday.

Sterling slipped by 0.1% to $1.3508 against the greenback, while also climbing by the same margin to €1.1552 against the euro.

Meanwhile, the US dollar index (DX-Y.NYB), which measures the greenback against a basket of six currencies, was up by 0.2% to 97.92.

The dollar gained momentum after the US Producer Price Index (PPI) for August came in weaker than expected, reinforcing market expectations that the Federal Reserve will implement a rate cut at its meeting next week on 17 September.

With the US Consumer Price Index (CPI) set for release later on Thursday, analysts are forecasting a further uptick in headline inflation, expected to rise to 2.9% year-on-year for August. According to the CME's FedWatch Tool, markets are pricing in over 90% odds that the Fed will deliver a 25 basis-point rate cut.

The euro remained subdued, weighed down by political turbulence in France following the resignation of prime minister François Bayrou. Broader market sentiment, which favoured riskier assets, also dampened demand for the euro, causing it to lag behind its higher-yielding counterparts.

Attention is now turning to the European Central Bank’s (ECB) policy announcement later on Thursday. If ECB president Christine Lagarde signals that further rate cuts are unlikely, the euro could regain some ground.

Oil prices saw a slight pullback on Thursday, as concerns about softening demand in the US and growing oversupply risks weighed on sentiment. However, losses were limited by ongoing geopolitical tensions in the Middle East and Russia’s war in Ukraine, which continued to add uncertainty to the market.

Brent crude futures slipped 0.1% to trade at $67.41 per barrel at the time of writing, while West Texas Intermediate futures lost 0.3% to $63.50 a barrel.

Both benchmarks had gained more than $1 on Wednesday after Israel targeted Hamas leadership in Qatar and Poland activated its air defences, alongside NATO, to intercept suspected Russian drones that had strayed into its airspace amid attacks on western Ukraine. Despite the uptick in geopolitical risk, traders appeared to assess that these incidents posed no immediate threat to global oil flows.

The recent rally in prices followed a rebound in early September, after crude had dropped to a three-month low on 5 September. Yet, with attention now shifting to supply-demand fundamentals, market participants are increasingly focused on the latest data.

The US Energy Information Administration (EIA) reported a rise in crude inventories by 3.9 million barrels for the week ending 5 September, contrary to expectations of a 1 million barrel drawdown. Gasoline stocks also saw a 1.5 million barrel increase, defying forecasts for a small decline.

This build-up in inventories comes as the US economy shows signs of slowing. Weaker labour market indicators and falling producer prices are pointing to a softening in demand, further clouding the outlook for crude consumption.

“Easing labour market conditions mean the FOMC is set to vote for a 25bp cut next week … although a rare triple dissent in favour of a 50bp move could steal the headlines,” Stephen Brown, deputy chief economist for North America at Capital Economics, said in a note.

Gold prices edged lower in early European trading on Thursday as investors turned cautious ahead of key US inflation data, though the metal remained near record highs, supported by strong expectations that the Federal Reserve will announce an interest rate cut next week.

At the time of writing, gold futures retreated 0.5% to $3,664.30 per ounce, while the spot price of gold dropped 0.5% to $3,627.61 a troy ounce, after hitting a record high of $3,659.10 on Tuesday.

Investor sentiment has been further supported by concerns over the Federal Reserve’s independence, following a ruling from a federal judge temporarily blocking US president Donald Trump’s attempt to remove Fed governor Lisa Cook.

The move to oust Cook, which had raised alarm over potential political interference in monetary policy, has sparked uncertainty, particularly given the administration's appeal against the decision.

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Gold's sensitivity to interest rate expectations has also provided a cushion to prices. Lower rates reduce the opportunity cost of holding the non-yielding asset, while typically weighing on the value of the dollar.

Traders are now pricing in an almost certain 25 basis-point rate cut when the Federal Reserve meets next week, with some market participants even betting on a larger move.

In equities, the FTSE 100 (^FTSE) was higher on Thursday morning, up 0.5% to trade at 9,267 points. For more details on market movements, check our live coverage here.

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