Pound US Dollar Exchange Rate Gains as UK Inflation Hits Three-Year High

Pound US Dollar Exchange Rate Continues to Climb after Dovish Fed Comments

(Updated 15:45, 14/7/21) The Pound US Dollar (GBP/USD) exchange rate has maintained its upward trajectory this afternoon, with the pair now trading at around $1.388, up by 1% from the start of today’s session.

The extended upside comes as the Federal Reserve published the written testimony due to be delivered to Congress by Fed Chair Jerome Powell this evening. The testimony reiterates the Fed’s dovish view that the surge in US inflation is being driven largely by temporary factors.

The ‘Greenback’ is down across the board, allowing the Pound US Dollar exchange rate to consolidate its gains.

Original article continues below:

Pound US Dollar Exchange Rate Strengthens on UK Inflation

The Pound US Dollar (GBP/USD) exchange rate has strengthened this morning, after UK inflation overshot expectations and jumped to a three-year high.

The pair is currently trading around $1.385, regaining the ground it lost in yesterday’s session.

Pound (GBP) Firms as UK Inflation Beats Forecasts

The Pound (GBP) has been climbing this morning after UK inflation jumped to 2.5% in June, the highest reading since August 2018 and above expectations of 2.2%. Core inflation rose to 2.3%, also 0.3% above predictions.

The unexpected rise indicates a robust economic recovery in the UK, and it puts more pressure on the Bank of England (BoE) to consider tightening monetary policy.

Sam Cooper, Vice President of Market Risk Solutions at Silicon Valley Bank, said:

‘The upside surprise in the UK’s CPI reading could question the BoE’s view that inflation is transitory as the consumer price gauge recorded its second beat in two consecutive months.

‘The data has provided sterling with an immediate boost against the dollar, as it provides evidence inflation is running hot on both sides of the Atlantic and the BoE is subsequently under the same pressures as the Fed to monitor price rises and potentially tighten their grip on monetary policy’.

However, others have highlighted that inflation has been pushed up by temporary effects, such as a surge in fuel prices, pent-up demand and supply shortages.

All eyes will be on how the BoE responds to this latest reading.

US Dollar (USD) Softens as Market Mood Improves

The US Dollar (USD), meanwhile, has softened somewhat after it surged yesterday on the jump in US inflation.

The modest downside comes amid an improved market mood, with seemingly strong economic rebounds in the UK and US renewing optimism in a global post-pandemic recovery, slightly dampening demand for the safe-haven ‘Greenback’.

However, the US Dollar is still buoyed by yesterday’s inflation figures, with USD investors looking ahead to Federal Reserve Chair Jerome Powell’s testimony before Congress this evening.

With US inflation now at 5.4% and having overshot expectations for four consecutive months, the Fed is under more pressure to begin tightening monetary policy. In anticipation of a hawkish turn from the Fed, the downside in USD will likely be limited.

Pound US Dollar Exchange Rate Forecast: All Eyes on Fed Chair Powell

How the Fed chooses to respond to the latest US inflation reading could massively impact USD exchange rates. Powell’s testimony tonight might provide hints as to how the Fed will react, and investors will be scrutinising it. As such, it could have a big influence on the Pound US Dollar exchange rate.

Similarly, GBP investors will want to know how the BoE will respond to UK inflation. Any comments from BoE policymakers could drive movement in the Pound.

Turning to tomorrow, Sterling could find support early on as the latest unemployment and earnings figures are expected to paint a broadly positive picture of the UK labour market.

The US Dollar could catch up in the afternoon, however, as its own jobs data reports are forecast to reveal another fall in unemployment.