(Updated 16:45 12/04/22)
The Pound US Dollar (GBP/USD) exchange rate recovered from some of its earlier losses as the day went on. The US Dollar fell in the face of aggressive profit-taking following fresh US inflation figures.
The US rate of inflation hit 8.5% in March, its highest point since 1981. Investors had adopted a ‘buy the rumour, sell the fact’ attitude however which saw USD fall once the figures printed better than their expectations.
At time of writing the GBP/USD exchange rate is at around $1.3040, nearly unchanged from this morning’s opening figures.
Pound US Dollar (GBP/USD) Exchange Rate Dips amid Hawkish Fed Outlook
The Pound US Dollar (GBP/USD) exchange rate is trending lower today. A poor outlook for the UK’s labour market is likely weighing on the Pound (GBP). The Federal Reserve’s hawkish forward outlook meanwhile may be helping to push the US Dollar (USD) higher.
At time of writing the GBP/USD exchange rate is at around $1.3003, which is down roughly -0.2% from this morning’s opening figures.
Pound (GBP) Drops as Real Wages Fall and Workers Leave Job Market
The Pound (GBP) is dipping against the majority of its competitors today. A pessimistic forward outlook for the UK’s labour market following employment figures this morning may be weighing on Sterling.
Whilst unemployment fell to 3.8% in February, below pre-pandemic levels, real wages continued to fall in the face of the UK’s cost of living crisis. Additionally, rising long-term sickness is thought to be pushing more workers out of the labour market and increasing the country’s economic inactivity. Analysts highlighted that older workers are the group most affected by this recent change and are placing a strain on the country’s labour market.
Ben Harrison, economist at PwC, said:
‘This group is suffering from higher levels of long-term sickness, with long Covid expected to be the primary new cause for this increase. We expect higher inactivity to become a permanent feature of the UK labour market, as around six in 10 of these older workers say they will not consider returning to work in the future.’
Major losses for Sterling may be limited by the prospect of action from the Bank of England (BOE) however. Job vacancies hit a fresh record high of 1.288 million amid the diminished supply of skilled workers, and could lead to increased expectations of a rate hike from the Bank of England (BoE).
US Dollar (USD) Climbs as Fed Signals 0.5% Rate Hike
The US Dollar (USD) is climbing against many of its rivals today as a hawkish outlook from the Federal Reserve prompted renewed interest in the safe-haven ‘Greenback’. An uptick to US Treasury bond yields is also likely helping to prop up USD today.
Markets now seem largely convinced that the Fed will enact a series of aggressive rate hikes throughout 2022. Signals from multiple Fed policymakers in recent weeks have only added to these speculations. On Monday, Fed board member Charles Evans stated that a 0.5% interest rate hike at the central bank’s upcoming meetings was likely.
Speaking at the Detroit Economic Club, Evans said:
‘Fifty is obviously worthy of consideration; perhaps it’s highly likely even if you want to get to neutral by December.’
A fragile risk appetite is also likely helping to push USD higher today amid the war in Ukraine. Unverified reports from the city of Mariupol today indicated that Russian forces have made use of phosphorous munitions.
GBP/USD Exchange Rate Forecast: Will UK & US Inflation See Fresh Highs?
For the Pound, fresh highs for the UK’s rate of inflation in March could push Sterling higher. Investors will be hoping for the BoE to raise rates in order to counter the soaring figures.
Looking to the week ahead for the US Dollar, Tuesday’s inflation figures are forecast to rise higher which may boost USD higher. A rise to PPI figures on Wednesday, the Fed’s preferred measure of inflation, could have a similar effect.
Speeches from multiple Fed policymakers throughout the week could also see USD climb should they echo the Fed’s hawkish stance.
Finally, a rise to March’s retail sales could also bolster the US Dollar should they print as forecast.