Pound Buoyed by Renewed Rate Hike Bets, USD Surges as Inflation Soars

GBP/EUR Exchange Rate: Pound Surges on BoE Rate Hike Bets

After remaining subdued through last week, the Pound Euro exchange rate has climbed sharply since Monday following high-impact UK data releases that support the case for the Bank of England (BoE) to raise interest rates.

The UK unemployment rate fell more-than-expected to 4.3% in the three months to September, down from 4.5%, while payrolls data for October indicated the number in employment rose despite the end of the furlough scheme.

Meanwhile, inflation in the UK soared to a 10-year high of 4.2% in October, above forecast of 3.9% and up on September’s 3.1%.

Following BoE comments on inflation and waiting to see recovery in UK employment, the pressure may increase for the central bank to hike rates at its December meeting, although policymakers have continued to reiterate their view that inflation is transitory.

GBP/USD Exchange Rate: Pound Slips on Slowing UK GDP and Brexit

The Pound US Dollar exchange rate has traded in a wide range since last week’s session, giving up gains the pairing had made last week.

UK GDP growth slowed more-than-expected to 1.3% in the third quarter, down from 5.5% in the second quarter and missing expectations of 1.5%, denting GBP/USD at the end of last week.

Contrasting reports over the tone in UK-EU negotiations over the Northern Ireland protocol and the possibility of the UK government activating Article 16 have fuelled additional fluctuations in GBP/USD.

Looking ahead, recovering UK retail sales back to growth after five months of contraction may provide the Pound support, ahead of forecasted lower manufacturing and services PMI data next week.

USD/GBP Exchange Rate: Soaring US Inflation Boosts US Dollar

The US Dollar made sharp gains against the Pound last week before holding in a narrow range so far this week.

An unexpected jump in US inflation to 6.2% in October, higher than 5.8% expected and a sharp increase on the 5.4% reading in September sent the US Dollar surging.

Global inflation jitters soured market sentiment, in turn boosting demand for the safe-haven currency, while bets increased on the Federal Reserve tightening monetary policy more aggressively also boosted USD.

Speculation over a potential rate hike from the Federal Reserve will continue driving movement in the US Dollar, as will President Biden’s decision whether to keep Jerome Powell as chairman of the Fed, or replace him with Lael Brainard.

EUR/USD Exchange Rate: Euro Plunges to 15-Month Low

The Euro has plummeted to a 15-month low against the US Dollar this week, sliding on warnings from European Central Bank (ECB) policymakers not to tighten monetary policy too soon.

ECB President Christine Lagarde reiterated that conditions for a rate hike in 2022 are ‘very unlikely’ and that tightening policy to slow inflation could derail the Eurozone recovery.

The perceived policy gap increasing between the ECB and Federal Reserve and BoE on monetary policy support caused EUR exchange rates to plunge.

Looking ahead, the Euro may come under increased pressure as forecasts point to dipping Eurozone consumer sentiment in November, slowing growth in Eurozone manufacturing and services PMIs in October, and another drop in German business confidence for November.

Andrew Roberts

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