Pound US Dollar (GBP/USD) Exchange Rate Climbs as Investors Digest UK Inflation

GBP/USD Exchange Rate Firms This Afternoon on High UK Inflation

(Updated 16:00, 17/11/2021) The Pound US Dollar (GBP/USD) exchange rate is edging up this afternoon as Pound (GBP) investors are more optimistic over the UK’s high inflation reading.

The Guardian newspaper observes that Sterling rallied as the jump in inflation boosted speculation that the Bank of England (BoE) could raise interest rates: Russ Mould, investment director at AJ Bell, says the sight of inflation at a 10-year high of 4.2% makes for uncomfortable reading.

It ‘almost certainly means’ the BoE will raise rates soon, potentially in December, Mould adds; ‘there is a real chance that rates keep going up by small increments and after a while this starts to make life more difficult for consumers and companies.’

Mould’s comments contrast with remarks from other economists, who caution that there are still plenty on the [Monetary Policy Committee] who are wedded to the narrative that inflation is transitory.

Meanwhile, the US Dollar (USD) faces headwinds as shortages of materials and workers weigh upon the country’s homebuilding sector. Hurricane Ida disrupted house construction in the South and Northeast of the US, as flooding and high winds forced builders to down tools.

Coming at a time when the US logistics industry was already suffering from pandemic disruptions, the hurricane exacerbated supply chain delays, causing power outages, cutting access to fuel and shutting down ports, rail terminals and roads.

Original article continues below:

Pound US Dollar Exchange Rate Trades Level despite Higher-Than-Expected CPI

The Pound US Dollar (GBP/USD) exchange rate lifted slightly this morning following the release of October’s UK inflation data: CPI reached 4.2% last month as opposed to expectations of 3.9%.

GBP/USD subsequently dropped back down as investors contemplated the implications of the rise.

At the time of writing, GBP/USD is trading at $1.3428, virtually unchanged from today’s opening levels.

Pound (GBP) Firms Overall as Inflation Soars

The Pound (GBP) is up against the majority of its peers this morning as UK inflation data exceeded October forecasts.

The rise to 4.2% was driven by upward pressure from the cost of housing and utilities: namely electricity, gas and liquid fuels. Rising energy prices reflect a global surge in cost and follow Ofgem’s raising of the energy price cap.

Subsequently, the cost of living squeeze has intensified ahead of a tough winter. Concern is widespread that the poorest families in the UK will struggle to heat their homes, as 3 million Britons currently live in fuel poverty.

Analysts and policymakers themselves have predicted that inflation will climb even higher next month and into 2022. According to Suren Thiru at the British Chamber of Commerce:

‘A substantial winter surge in inflation remains probable with the rising cost of imported raw materials and higher energy prices likely to lift inflation to around 5% next year.’

Consequently, the pressure will be mounting on the Bank of England (BoE) to raise interest rates to keep inflation under control.

US Dollar (USD) Trades Mixed on Profit-Taking, Fed Uncertainty

The US Dollar (USD) is trading in a mixed range this morning as a lack of significant data so far exposes the currency to losses, alongside profit-taking ahead of this afternoon’s speeches.

Meanwhile, rising 10-Year US Treasury bond yields lend upside as markets speculate whether an imminent interest rate hike from the Federal Reserve is on the cards.

St. Louis Fed President James Bullard called for the FOMC to turn ‘more hawkish’ in the upcoming meetings, while San Francisco Fed President Mary Daly said the central bank should stay patient when it comes to hiking its policy rate.

Yesterday’s retail sales seemed to indicate that the American economy was expanding: however, as Ipek Ozkardeskaya, senior analyst at Swissquote, explains:

‘The US retail sales grew 1.7% in October… however the jump was mostly because things costed more.

GBP/USD Exchange Rate Forecast: Fed Speeches to Affect USD Sentiment?

A lack of significant data for the remainder of the session leaves the Pound US Dollar exchange rate to trade upon speeches from Federal Reserve officials, who may hint at revised forward guidance from the central bank.

GBP/USD may also be affected by Brexit developments and other external factors.

Olivia Evershed

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