GBP/USD Exchange Rate Pressured by Stronger-than-Expected US Inflation Print
(Updated 14:15, 10/2/22) The Pound US Dollar (GBP/USD) exchange rate is on the defensive this afternoon, with the pairing having shed its modest gains from earlier in the session in response to the latest US inflation release.
January’s consumer price index revealed US inflation surged to 7.5%, striking its highest levels since February 1982.
The hotter-than-expected inflation print has seen USD investors begin to reprice their expectations for the Federal Reserve’s March interest rate decision, with markets now seeing a 50/50 chance of a half-percentage hike.
Meanwhile, fresh concerns over the UK’s cost-of-living crisis appear to be limiting the appeal of the Pound this afternoon.
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GBP/USD Exchange Rate Muted of US Inflation Release
The Pound US Dollar (GBP/USD) exchange rate is trading in a narrow range this morning as markets brace for today’s US inflation print.
At the time of writing the GBP/USD exchange rate is trading at around $1.3549, virtually unchanged from this morning’s open levels.
US Dollar (USD) to Rally on Surging Inflation?
The US Dollar (USD) is trading without any bullish conviction this morning as traders abstain from any aggressive bets ahead of this afternoon’s US consumer price index.
Economists forecast January’s CPI release will report US inflation climbed to a dizzying 7.2%, having previously struck a near 40-year high of 7% in December.
USD investors will be closely watching the release as they seek to gauge how aggressively the Federal Reserve might hike interest rates when its policymakers next meet in March.
According to CME Group’s FedWatch tool, the odds of a quarter point hike next month is currently 77%, against 23% for a half percentage increase.
However, today’s CPI print could significantly rebalance these odds, particularly as Fed policymakers have so far refrained from ruling out the possibility of the Fed delivering its first 50bps hike since 2000.
Aneta Markowska, chief financial economist at Jefferies LLC, comments:
‘Because the Fed hasn’t taken it off the table, or said it’s extremely unlikely, the market is going to run with it. The Fed’s reaction function relies on one variable and that is inflation. These numbers are going to matter, big time.’
Expect the US Dollar to strengthen if inflation jumped as expected last month.
Pound (GBP) Muted in Wake of BoE Pill’s Cautious Comments
At the same time, the Pound (GBP) is struggling to attract support this morning, in the wake of comments made by Bank of England (BoE) Chief Economist Huw Pill on Wednesday.
In a speech titled ‘Monetary policy with a steady hand’, Pill -who was one of the five policymakers who voted for a hike of 25bps last week- appeared to temper expectations the BoE will pursue an aggressive path of rate hikes this year.
Pill said the monetary policy committee is in the ‘very uncomfortable position’ of predicting how inflation will move in 2022 and the bank’s interest rate outlook was uncertain beyond the next few months.
With this in mind, GBP investors will pay close attention to a speech by BoE Governor Andrew Bailey later this evening.
If Bailey’s echoes Pill’s cautious comments then the Pound could weaken.
Pound US Dollar Forecast: Underwhelming GDP to Dent GBP/USD?
Looking ahead to tomorrow’s session, the Pound US Dollar exchange rate could face some headwinds with the publication of the UK’s latest GDP figures.
The emergence of the Omicron Covid variant at the end of last year poses a clear threat to UK growth in December, and this could weigh on the GBP/USD exchange rate if it results in Q4 growth underperforming.
Meanwhile the focus for USD investors tomorrow will be on the University of Michigan’s latest consumer sentiment index. Will an improvement in consumer morale help the US Dollar to close the week on a positive note?