Pound US Dollar Exchange Rate Steady amidst Fed Rate Hike Speculation

(Updated 16:50 19/11/21)

The Pound US Dollar (GBP/USD) exchange rate has stabilised following upbeat UK retail sales data, after having slumped this morning against a strong US Dollar.

At time of writing the GBP/USD exchange rate is at around $1.3472 which is down -0.2% from this morning’s figures.

Pound US Dollar (GBP/USD) Exchange Rate Slumps in Risk-Off Trade

The Pound US Dollar (GBP/USD) Exchange Rate has fallen this morning, as more risk-averse trading has strengthened the safe-haven ‘Greenback’.

At time of writing the GBP/USD exchange rate is at around $1.3411 which is down -0.6% from this morning’s opening figures.

US Dollar (USD) Soars as Investors Eye Fed

The US Dollar (USD) has soared this morning as investors place speculative bets on an early interest rate rise by the Federal Reserve. A boost to treasury yields may also have played a part in the currency’s movements.

US inflation rose last week to its highest level in 30 years, as rising energy costs and supply shortages pushed the rate to 6.2%. The Fed has previously stated their belief that the current inflationary pressures are transitionary, although hawkish rhetoric from the Fed President John Williams has fuelled speculation of an early interest rate hike.

Advancement of the country’s ‘Build Back Better’ plan may also be driving movement in USD today with the White House expects the plan to reduce the US deficit by $112 billion.

The new bill has been seen as a cornerstone of President Joe Biden’s economic policy and has been cited by other Democrats as ‘transformational’. The proposed measures have come under criticism from both sides of the isle however, with tax measures that purportedly favour the wealthy being held up as a primary concern.

Pound (GBP) Falls despite Upbeat Retail Data

The Pound (GBP) has fallen this morning amid more risk-averse trading as the country records higher than forecast retail sales figures.

Retail sales in the UK rose by 0.8% which was above forecasts of a rise of 0.5%. The figures are now 5.8% above pre-pandemic levels from February 2020. This was coupled with a rise above forecasts in consumer confidence.

The strong data is thought to have been driven by consumer fears of shortages in retail in the run up to Christmas, leading to earlier gift buying in larger volumes. A further boost was provided by spending on Halloween decorations and chocolate, as COVID-19 fears had curtailed trick or treating the previous year.

Retailers are still facing supply shortages moving into the festive period, as well as fears that the rise in cost of living may harm sales in future months. Helen Dickinson, chief executive of the British Retail Consortium, had the following to say on retailers’ prospects in the coming months:

‘While retailers are putting in a gargantuan effort to ensure that essential food and gifts are ready for Christmas, they continue to be dogged by ongoing challenges supply chain problems. Labour shortages throughout the supply chains – from farms to distribution – are pushing up costs and creating some gaps on the shelves.

Nonetheless, retailers are prioritising Christmas essentials, and many have laid out their festive offerings a little earlier to ensure everyone has time to buy treats and decorations before the big day. Retailers are hopeful that demand will continue right through the golden quarter, however, challenges remain, with higher prices looming and many households facing rising energy bills.’

These further signs of economic recovery will place further pressure on the Bank of England (BoE) to raise interest rates earlier than anticipated. The central bank has repeatedly stated that an early rate rise would only come about if there was evidence the UK economy had recovered post-furlough. Speculation of an early rate rise could fuel bets by investors, driving further movement in Sterling.

GBP/USD Forecast: Will PMI Figures force Central Banks to Raise Rates Early?

Looking ahead to next week, significant data for the UK will come in the form of Flash PMIs. These are expected to report a modest fall in activity in the UK private sector potentially exerting some pressure on the Pound US Dollar exchange rate.

Tuesday will also bring PMIs for the US. The Markit releases are currently forecast to show weakening of growth in both the manufacturing and service sectors which could limit the appeal of the US Dollar.

Wednesday will then see the release of US Durable Goods Orders release for October, with an expected rebound in order growth potentially buoying USD exchange rates.

Gareth Monk

Contact Gareth Monk