GBP/USD Exchange Rate Plunges Down on US PCE Price Index
(Updated 17:00, 29/10/2021) The Pound US Dollar (GBP/USD) exchange rate has fallen substantially this afternoon, as the US Dollar (USD) skyrockets against its peers. The US PCE price index rose by 4.4%- as the Fed’s preferred measure of inflation, such a significant increase has fanned bets of monetary policy tightening by the Federal Reserve.
In line with the above, employers have boosted compensation by the most on record in the third quarter as they compete for scarce workers. A report from the Labor Department on Friday revealed that the Employment Cost Index, the broadest measure of labor costs, surged 1.3% in the third quarter, powering ahead 3.7% year-on-year.
Veronica Clark, an economist at Citigroup in New York, observes:
‘While wage increases were initially concentrated in lower- wage industries, more recently wage pressures have been broadening across industries.’
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, also rose last month by 0.6%. Spending was driven by demand for services such as healthcare, dining out, and hotel accommodation amid declining coronavirus cases.
Combined, these factors are likely to throw doubt upon the ‘transitory inflation’ narrative. According to Christopher Rupkey, chief economist at FWDBONDS in New York:
‘The economy has a supply problem not a demand problem… the economy has money to burn and that is why inflation will be hard to extinguish.’
Original article continues below:
GBP/USD Exchange Rate Fluctuates in Wake of UK Data, USD Recovers
The Pound US Dollar (GBP/USD) exchange rate is trading in a narrow range this morning, as investors digest the Bank of England (BoE)’s consumer credit release for the month of September. The US Dollar (USD) has recouped losses against several of its peers in the wake of yesterday’s disappointing GDP data.
At the time of writing, GBP/USD is trading at $1.3787, virtually unchanged from today’s opening levels.
Pound (GBP) Subdued Following Consumer Credit Report
The Pound (GBP) is trading down this morning against the majority of its peers, as a lower-than-expected consumer credit figure from the Bank of England joins Brexit headwinds in weighing on Sterling sentiment.
Consumer credit in the UK decreased to £200m in September from £351m in August 2021, indicating decreased spending in addition to reduced borrowing.
However, investors’ spirits may pick up as they comb through the data: though the annual growth rate for all consumer credit remained weak, it increased to -1.8% in September from -2.4% in August.
Elsewhere, the BBC reported yesterday that France had seized a British trawler and fined another one, amid an ongoing spat over post-Brexit fishing rights.
A representative from Macduff Shellfish, the company that owns the trawler, has insisted that the boat’s fishing activities were entirely legal, but that the vessel had been ‘caught up’ in the ongoing UK-France post-Brexit fishing row.
French maritime minister Annick Girardin says the trawler was fishing in the Bay of Seine without the proper licenses. Girardin admitted, however, that checks on British boats had been undertaken against the backdrop of tightening controls, inferring the dispute is a taste of what’s to come.
US Dollar (USD) Steadies in Wake of Poor GDP
The US Dollar (USD) is recovering this morning following yesterday’s disappointing GDP release. The US Bureau of Economic Analysis’ first estimate showed that the US economy grew by only 2% in the third quarter, missing expectations.
Into today, the benchmark 10-year US Treasury bond yield is on the rise, pushing higher after gaining 2% yesterday. Risk sentiment appears mixed, which may also generate some support for the safe-haven currency.
Later this afternoon, the US will release its PCE price index – the Federal Reserve’s preferred measure of inflation. A small rise of 0.1% is expected for the year to September, invalidating concerns of ‘hyperinflation’.
Twitter and Square CEO Jack Dorsey tweeted earlier this month that ‘hyperinflation is going to change everything. It’s happening’: his claims were dismissed, however, by economics experts.
According to David Rosenburg, an economist and president of Rosenburg Research, the trend of rising prices in the U.S. is simply due to supply chain issues brought on by the ongoing pandemic.
While Rosenburg adds that suggesting the current rate of inflation could grow to hyperinflation is ‘totally ridiculous’, investors hope that ongoing inflationary pressures will encourage earlier tightening measures from the Fed. Futures on the fed funds rate have fully priced in a quarter-point tightening by July 2022, factoring in another rate increase by December.
Pound US Dollar Exchange Rate Forecast: Rate to Fall Further on US Inflation?
Looking ahead, an increase in US inflation is likely to support the US Dollar if it is assumed to increase the chances of monetary policy tightening. If GBP investors remain subdued over this morning’s consumer credit release, the ‘Greenback’ may take the lead.
Meanwhile, some smaller releases this afternoon may dampen USD trading, if Michigan consumer sentiment reflects a fall in morale. Risk appetite and Brexit concerns may also affect the Pound US Dollar exchange rate.