• The Pound Sterling drops from 1.2680 as deepening Middle East tensions hurt risk-sensitive currencies.
• A sharp dip in UK inflation expectations improves BoE’s early rate cut hopes, weighing on the Sterling.
• The US Dollar bounces back ahead of the US Nonfarm Payrolls report.

The Pound Sterling (GBP) retreats to 1.2620 in Friday’s London session after failing to recapture the round-level resistance of 1.2700. The GBP/USD pair falls back as escalating geopolitical tensions and caution among market participants ahead of the United States Nonfarm Payrolls (NFP) report for March has boosted demand for the US Dollar. 

Deepening uncertainty about when the Federal Reserve (Fed) will start reducing interest rates keeps investors on tenterhooks. On Thursday, Minneapolis Fed Bank President Neel Kashkari said rate cuts won’t be required this year if inflation stalls. Kashkari also said he forecasted two rate cuts for 2024 in the latest dot plot.

Meanwhile, easing inflation expectations in the United Kingdom has weighed on the Pound Sterling. The latest Bank of England (BoE) Decision Maker Panel (DMP) survey for February showed that most firms see selling prices and wage inflation cooling down over the next year. Selling price expectations decelerated to 4.1% from 4.3%, the lowest reading in over two years. Wage growth expectations softened to 4.9% on a three-month moving average basis from 5.2% in February. 

Easing inflation expectations are expected to boost BoE rate cut expectations for the June meeting. Deepening hopes for BoE early rate cuts negatively influence the Pound Sterling.