Pound US Dollar (GBP/USD) Exchange Rate Tumbles as Rate Hike Looks Unlikely
(Updated 16:15, 15/12/21) The Pound US Dollar (GBP/USD) exchange rate tumbled this afternoon as hopes of a Bank of England (BoE) rate hike faded. GBP/USD slid to a low of $1.32141, about 0.5% down from today’s highs.
After the UK’s inflation rate soared to a ten-year high this morning, some traders brought forward their bets for a BoE rate rise at the bank’s meeting tomorrow.
However, most economists believe that the Monetary Policy Committee (MPC) will not raise rates. The rapid spread of the Omicron variant has created significant uncertainty around the UK’s recovery. In addition, price pressures have been pushed up by temporary factors.
With a BoE rate hike unlikely, investors are turning to the Federal Reserve’s decision tonight instead. The Fed has signalled that it will go ahead with plans to accelerate its tapering of bond purchases, despite Omicron. This now seems to be lifting the US Dollar (USD) against the Pound (GBP).
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Pound US Dollar (GBP/USD) Exchange Rate Climbs ahead of Fed on UK Inflation
The Pound US Dollar (GBP/USD) exchange rate has jumped higher today after the UK’s inflation rate reading exceeded market forecasts. Meanwhile, the US Dollar (USD) is muted ahead of the Federal Reserve interest rate decision tonight.
At the time of writing GBP/USD is trading around $1.326, up from about $1.324 as the European session opened this morning.
Pound (GBP) Jumps as UK Inflation Hits Ten-Year High
The Pound (GBP) rose sharply as today’s session began after the UK’s CPI overshot forecasts.
Economists expected the inflation rate to come in at 4.7% for November, 0.5 percentage points above October’s reading. Instead, UK inflation soared to a ten-year high of 5.1% last month.
The CPI comes as the Bank of England (BoE) prepares for its interest rate decision tomorrow. At last month’s meeting, the bank predicted that UK inflation would peak at 5% in early 2022. Today’s reading shows that inflation continues to outpace the BoE’s forecasts.
As a result, markets have priced in a higher likelihood of a BoE rate hike at tomorrow’s meeting.
However, most economists expect the BoE to hold its Bank Rate due to the uncertainty caused by Omicron. Many policymakers, including the hawkish Michael Saunders – who voted for a rate hike at the last decision – have signalled that the new Covid variant could delay a rate hike. With the UK now seemingly in a race between Omicron and the government’s booster programme, rate-setters are likely to exercise caution.
In addition, some of the factors affecting inflation are one-off events, argues Paul Dales of Capital Economics:
‘The 5.1% month-on-month rise in fuel prices is unlikely to be repeated now that oil prices have fallen back. And the 4.2% m/m rise in tobacco prices was mainly due to the hike in tobacco duties in October’s Budget. Finally, the rise in clothing inflation from -0.4% in October to +3.5% in November had more to do with the unusual fall in prices last November rather than any unusual strength this November (i.e. it was due to base effects).’
Therefore, GBP/USD’s gains may be limited today.
US Dollar (USD) Muted ahead of Fed Decision
Meanwhile, the US Dollar (USD) is subdued today as investors await the Federal Reserve’s interest rate decision this evening.
After hints from Fed policymakers in recent weeks, and despite the spread of Omicron, markets expect the US central bank to accelerate its tapering programme.
USD investors are likely holding back their bets until after the meeting.
GBP/USD Exchange Rate Forecast: Fed Decision in Focus
As the day goes on, we may see the Pound lose some of its gains. A BoE rate rise tomorrow is unlikely (though not impossible) and the UK’s surging inflation rate could hit the country’s economy. The UK faces a cost-of-living crisis, with inflation outpacing wage growth and tax hikes to come in the new year.
However, with USD investors cautiously preparing for the Fed decision, the Pound could hold its gains.
Following the Fed’s meeting this evening we could see the ‘Greenback’ soar. A faster tapering cycle would signal an earlier rate hike, thereby boosting the appeal of the US Dollar.