Pound US Dollar (GBP/USD) Exchange Rate Sinks in Wake of of US Inflation

GBP/USD Exchange Rate Lowers as Inflation Exceeds Forecasts

(Updated 16:00, 10/11/2021) The Pound US Dollar (GBP/USD) exchange rate softened this afternoon as US inflation printed above expectations, at a 31-year high.

Annual headline inflation climbed to 6.2% as the cost of energy, shelter, food and new vehicles rose, along with that of use cars and trucks, apparel, transportation and medical care: core inflation also surged 4.6%, the largest annual increase since August 1991.

Investors hope that today’s data may encourage the Federal Reserve to tighten its monetary policy sooner rather than later: such speculation acts as a tailwind for US Treasury bond yields, which continue to underpin the ‘Greenback’.

However, Karen Ward from JP Morgan Asset Management said the reading would not be enough to prompt a ‘hawkish shift’ from the Fed. The central bank maintains that higher prices will be ‘transitory’, although it admits the difficulty of predicting supply chain constraints.

Forecaster Capital Economics reiterates the difficulty of knowing when inflationary pressures will stabilize:

‘The bottom line is that, while it remains difficult to predict how far or for how long the various ‘transitory’ factors will boost inflation, there is increasing evidence that inflationary pressures are broadening out, underlining that inflation will remain elevated for longer than Fed officials expect.’

Original article continues below-

Pound US Dollar Exchange Rate Slides on a Risk-Off Mood

The Pound US Dollar (GBP/USD) exchange rate has sunk this morning as a risk-off mood prevails. Investors are bearish ahead of the US Consumer Price Index (CPI) inflation report and weekly jobless claims figures.

At the time of writing, GBP/USD is trading at $1.3534, down 0.2% from today’s opening levels.

Pound (GBP) Subdued on a Lack of UK Data

The Pound (GBP) is falling against the majority of its peers this morning as a lack of significant data leaves the currency exposed to headwinds. Sterling sentiment is muted amid tense discussions between the UK and EU over the Northern Ireland protocol.

The Pound has also been hurt by the latest forecasts from the National Institute of Economic and Social Research (NIESR). NIESR warns that the UK will suffer stuttering growth, rising inflation and widening income inequalities in the coming months, with many families being pushed further into poverty.

NIESR also cautioned that UK regional inequality is rising, and predicted that persistent supply-chain bottlenecks and Brexit headwinds are likely to damage Britain’s economy over a number of years.

Jagjit Chadha, the NIESR director, largely blames the government for the inevitable difficulties ahead, arguing that it has come to rely on low interest rates to prop up the economy, with ministers abdicating responsibility for directing investments to where they’re most needed.

Chadha said a hard Brexit had made the situation worse:

‘Short-run supply problems will persist and are likely to be exacerbated by Brexit. This is because our exit from the EU has acted to reduce the pool of labour, contributed to lower levels of firm investment … and led to contraction in the size of our trade sector.’

US Dollar (USD) Supported by Inflation Concerns

The US Dollar (USD) is up against its peers this morning as low risk sentiment lends support to the safe-haven currency. Investors are concerned about persistent inflationary pressures, leading to profit-taking in the global equity markets.

US inflation for the month of October will be revealed this afternoon and is expected to have risen to a new high of 5.8%. September’s 5.4% reading hit a 13-year high as the prices of shelter, food, new vehicles and energy applied upside pressure.

Inflation expectations have enabled a goodish pickup in the US Treasury bond yields, as prospects of monetary policy tightening act as a tailwind. Markets assume that stubbornly high inflation will force the Federal Reserve to adopt a more aggressive monetary policy response.

Reuters corroborates:

‘Market analysts are eager to get their hands on U.S. consumer prices data on Wednesday as a stronger than expected reading would rekindle talk of the Federal Reserve raising interest rates earlier than expected.’

GBP/USD Exchange Rate Forecast: US Dollar to Tick Up on Anticipated Policy Tightening?

US inflation data remains the main catalyst for movement in the Pound US Dollar exchange rate today, followed by weekly US jobless figures.

If inflation prints higher than last month, as expected, the ‘Greenback’ will likely enjoy tailwinds as investors predict subsequent monetary policy tightening.

Olivia Evershed

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