Pound US Dollar (GBP/USD) Exchange Rate Sinks Following Upbeat US PPI

Pound US Dollar Exchange Rate Drops on Strong US Data

(Updated 16:25, 09/11/2021) The Pound US Dollar (GBP/USD) exchange rate fell this afternoon as the US Producer Price Index (PPI) met expectations with a 0.6% rise. The PPI measures the average change over time in prices received by sellers, while CPIs (Consumer Price Indexes) measure price change from the purchaser’s perspective.

Over 60% of the increase in final demand prices stemmed from a 1.2% surge in the price of goods, namely gasoline (6.7%); prices of food edged down by 0.1%. Year-on-year, producer inflation remained at a record 8.6%, the same as in the previous month but below forecasts of 8.7%.

Ongoing inflationary pressures in the US reflect continuing supply chain disruptions amid high demand. In addition to raw material shortages, businesses in the US are also wrestling with near-record job openings and not applicants to fill them.

To attract job seekers, many firms have opted to raise wages and extend benefits to their employee – these costs, however, are being passed on to consumers who, what with the current energy crunch to contend with, are likely to be feeling the pinch this Christmas.

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GBP/USD Exchange Rate Firms on Risk-On Mood

The Pound US Dollar (GBP/USD) exchange rate is trading up this morning as a risk-on mood supports Sterling. The US Dollar (USD) is subdued as the benchmark 10-year US Treasury bond yield lost yesterday’s momentum.

At the time of writing, GBP/USD is trading at $1.3584, up slightly from today’s opening levels.

Pound (GBP) Supported by Strong Risk Appetite

The Pound (GBP) is trading up today against the majority of its peers. Despite a lack of significant data, GBP investors are bullish ahead of this afternoon’s speech from Bank of England (BoE) Governor Andrew Bailey.

British retailers are benefitting as UK shoppers start their Christmas haul early – according to the British Retail Consortium, total sales were up 1.3% in October from the same month a year ago, and up 6.3% from the same month in 2019.

Halloween helped to boost sales of children’s costumes and chocolates: sales of pumpkins were up 26% in the four weeks to 31 October.

Early Christmas adverts and warnings of shortages are now encouraging consumers to spend in spite of the cost-of-living squeeze. Fraser McKevitt, head of retail and consumer insight at market research group Kantar, reports:

‘[UK consumers] are keen to prepare early this year so [they] can dive head first into festivities. 4.7 million households bought mince pies this month… 1.6 million households bought their Christmas pudding this month as well, 400,000 more than last year.’

US Dollar (USD) Sentiment Low Following Dovish Fed Outlook

The US Dollar is struggling to throw off last week’s headwinds after the Federal Reserve signalled that policymakers were in no rush to raise borrowing costs.

So far this week, America’s central bank has maintained its dovish tone. November’s financial stability report flags concerns over the rise of stablecoins – cryptocurrencies that try to peg their market value to an external reference such as the US Dollar.

Policymakers are concerned about the consequences if a stablecoin can’t hold its value:

‘Certain stablecoins, including the largest ones, promise to be redeemable at any time at a stable value in U.S. dollars… [but] if the assets backing a stablecoin fall in value, the issuer may not be able to meet redemptions at the promised value.’

Also dragging on USD sentiment are concerns that stresses in China’s real estate sector could spill over to the US. As the world’s second-biggest economy, headwinds in China threaten global financial markets.

A report last month found that one third of China’s property developers will struggle to repay their debts in the next 12 months.

GBP/USD Exchange Rate Forecast: Fed Speeches to Direct Movement?

Looking ahead, speeches by various Fed officials today are likely to influence the Pound US Dollar exchange rate, along with the US Producer Price Index.

If central bank speakers maintain their dovish tone, USD is likely to come under further pressure; if policymakers strike a hawkish stance, however, the ‘Greenback’ may find some support.

A lack of UK data leaves the Pound to trade on Governor Bailey’s speech later today, alongside external factors.

Olivia Evershed

Contact Olivia Evershed