Pound US Dollar Exchange Rate Dives Following US CPI
(Updated 16:15, 10/06/2022) The Pound US Dollar (GBP/USD) exchange rate plunged to a 24-day low this afternoon, as US inflation revealed an increase in the country’s consumer price index (CPI): both core and unadjusted.
Rather than remaining at 8.3% as forecast, US inflation hit 8.6% – the highest rate since 1981 and 6.6% above the Federal Reserve’s target level. In prompting further fears of a global economic recession, the news attracts safe-haven support to the ‘Greenback’.
Shelter, food and gas were the largest contributors to May’s CPI, with energy prices rising by 34.6% – the most since September of 2005.
Commenting on the data, Sal Guatieri, senior economist at BMO Capital Markets said:
‘There’s little respite from four-decade high inflation until energy and food costs simmer down and excess demand pressures abate in response to tighter monetary policy.’
Such monetary policy may become even more aggressive in response to inflationary pressures, as Guatieri speculates that the Fed could easily ratchet up the pace if inflation keeps surprising to the upside.
Original article continues below:
GBP/USD Exchange Rate Trades Sideways on Relative USD Weakness
The Pound US Dollar (GBP/USD) exchange rate is trading unevenly this morning ahead of the release of US inflation data later today. Investors appear reluctant to place bullish bets ahead of the event, which may lead to US Dollar (USD) downside if core inflation fell in May.
At the time of writing, GBP/USD is trading at $1.2486, virtually unchanged from today’s opening levels.
US Dollar (USD) Struggles to Gain as Experts Predict Slowing Inflation
The US Dollar is subdued against its peers this morning given the later release of CPI data. While overall annualised inflation is forecast to remain unchanged on last month, the country’s core CPI looks to have fallen, potentially lessening the chance of aggressive rate hikes from the Federal Reserve.
Such a result may indicate a strengthening economy, which ordinarily would lend upside to a currency; but such indications are likely to sap safe-haven support for the ‘Greenback’.
On the other hand, stronger-than-expected inflation could also cause alarm, as Ipek Ozkardeskaya, senior analyst at Swissquote Bank, warns:
‘A stronger-than-expected inflation figure would revive the Federal Reserve hawks, and eventually push the S&P500 below the 4000 mark before the weekly closing bell.’
Furthermore, economic analyst Joseph Trevisani remarks:
‘There are good reasons to suspect that a portion of the May oil and gas price increases were not captured in the analysts’ surveys that produce the forecasts.’
USD losses are capped by elevated US Treasury bond yields, but further pressure weighs upon the currency in the form of stabilising equity markets and improved market mood.
Hawkish forward guidance from the European Central Bank (ECB) yesterday as well as softer Chinese inflation figures lend tailwinds to perceived riskier currencies to the detriment of safe-haven assets.
Pound (GBP) Trades Down Amidst Mixed Trading Stimuli
The Pound (GBP) is weakening against its rival currencies so far today, subdued by ongoing political jitters and Bank of England (BoE) rate hike speculation.
While a stronger market mood lends some upside to the Pound, a scarcity of significant UK data leaves Sterling exposed to external factors including domestic political disputes.
Former Brexit minister Lord Frost warned this morning that Boris Johnson will be ousted by his own party members by autumn if he does not set out a clear Conservative vision, prolonging the criticism MPs had hoped would be settled by the confidence vote.
Frost told the Telegraph:
‘Every prime minister has weakness and blind spots. The issue is whether they are able to compensate for them, by having the right people, by taking good advice, and by setting a clear policy direction with broad support.
Mr Johnson probably has between now and the party conference to show he can do that.’
Also dampening support for Sterling are employment statistics which add to signs that the UK recovery is slowing as firms struggle to hire staff.
British employers added staff in May at the slowest pace since early 2021, according to a survey by accountants KPMG and the Recruitment and Employment Confederation (REC).
Pound US Dollar Exchange Rate Forecast: US Inflation to Take Centre Stage
Looking ahead, US inflation data will undoubtedly be the main catalyst for movement in the Pound US Dollar exchange rate today.
Whether core inflation increases or falls as forecast, either outcome could subdue the ‘Greenback’, leading to potential GBP/USD upside.
Meanwhile, risk sentiment may drive additional movement in either currency, with ongoing optimism potentially boosting Sterling against its peers.