Pound US Dollar Exchange Rate Plummets to Near Five-Week Low as Fed Signals Interest Rates to Rise from 2023

GBP/USD Exchange Rate Nosedives Following Hawkish Fed Policy Meeting 

(Updated 08:30, 17/6/21) The Pound to US Dollar (GBP/USD) exchange rate is trading at around $1.3979 this morning, the pairing’s worst levels since early May. 

This comes in the wake of a sharp slump in GBP/USD exchange rate yesterday evening, in the wake of the Federal Reserve’s latest policy meeting. 

While the Fed kept its monetary policy unchanged as expected this month, the US central bank signaled it now sees interest rates starting to rise in 2023, rather than 2024 as previously forecast. The more hawkish outlook from the Fed triggered significant demand for the US Dollar and saw GBP/USD plunge over a cent. 

Original article continues below: 

Pound US Dollar Exchange Rate Firms Following UK CPI Release 

The Pound US Dollar (GBP/USD) exchange rate is rallying this morning, with the pairing rebounding to this week’s opening levels in response to the UK’s consumer price index. 

At the time of writing the GBP/USD exchange rate is trading at around $1.4117, up roughly 0.3% from this morning’s opening rate. 

Pound (GBP) Jumps as UK Inflation Beats Forecasts 

The Pound (GBP) is strengthening against the US Dollar (USD) and the majority of its other peers this morning, as GBP investors cheer the release of the UK’s latest CPI figures. 

According to data published by the Office for National Statistics (ONS), headline inflation accelerated from 1.5% to 2.1% in May, easily beating forecasts for a more modest rise of 1.8%. 

Underlying inflation also rose much quicker than expected, climbing from 1.3% to 2%, versus the 1.5% jump forecast. 

This sudden surge in inflation was attributed to sharp rises in prices of video games as well as clothing and footwear, driven in large part by consumers flocking back to stores as non-essential retail was allowed to reopen. 

May’s CPI figures also revealed that inflation climbed back within the Bank of England’s (BoE) target range for the first time since 2019. 

This is likely to fuel speculation that the BoE could soon start signaling plans to tighten its monetary policy, particularly in the wake of some notably hawkish comments from policymakers in recent weeks. 

US Dollar (USD) Steady as Investors Brace for Fed Rate Decision 

At the same time, the US Dollar (USD) is stuck trading in a narrow range this morning, as USD investors are reluctant to make any aggressive bets ahead of the conclusion of the Federal Reserve’s June policy meeting later this evening. 

The Fed isn’t expected to make any policy changes this month, but its forward guidance is likely to be key in determining the direction of USD exchange rates through the remainder of this week’s session. 

This could see the US Dollar fall if the Fed maintains its stance that the recent surge in US inflation is ‘transitory’, and avoids discussing the tapering its stimulus programme again this month. 

Conversely USD exchange rates could be turbo charged if policymakers start to hint at raising interest rates a little sooner than previously thought, in reaction to stronger-than-expected inflationary pressure. 

Pound US Dollar Forecast: Strong UK Retail Sales to Extend Sterling’s Recovery?

Looking past the Fed policy meeting to the second half of this week, the Pound to US Dollar (GBP/USD) exchange rate could receive additional support with the publication of the UK’s latest retail sales figures. 

Friday’s data is expected to report another healthy expansion of sales growth in May, but a stronger-than-expected release could allow Sterling to close the week on a high. 

In the meantime, USD investors will be keeping an eye on tomorrow’s US initial jobless claims, with another drop in new claims likely to buoy the appeal of the US Dollar. 

Matthew Andrews

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