Pound US Dollar Exchange Rate Nosedives on Modest UK Inflation Increase

Pound US Dollar Exchange Rate Tumbles on Easing BoE Rate Hike Bets

The Pound US Dollar (GBP/USD) exchange rate plummeted this morning. Shedding roughly half a cent as the UK’s latest inflation figures proved a little underwhelming.

At the time of writing the GBP/USD exchange rate is trading at around $1.2204. Down around 0.5% from this morning’s opening levels.

Pound (GBP) Plunges on Mixed UK Inflation Release

The Pound (GBP) is under significant pressure this morning following the publication of the UK’s consumer price index.

According to data published by the Office for National Statistics (ONS), UK inflation climbed to 9.1% in May. This was up from 9% in April and refreshed a 40-year high.

The accompanying core CPI figures also reported underlying inflation fell for the first time in eight months.

Sterling subsequently slumped as the modest rise in headline inflation, coupled with a larger-than-expected drop in the core CPI figures appears to have cooled Bank of England (BoE) rate hike expectations.

Paul Dales, chief UK economist at Capital Economics, said:

‘It is not obvious in this release that there are signs of the ‘more persistent inflationary pressures’ that last week the Bank said would prompt it to ‘act forcefully’. On its own, this release is probably not enough to seal the deal on a 50bps interest rate hike in August.’

The continued rise in inflation is stoking UK cost of living concerns. This is also weighing on the Pound this morning.

US Dollar (USD) Bolstered by Risk-Off Flows

The US Dollar (USD) is trending higher this morning. A prevailing risk-off mood bolstering demand for the safe-haven currency.

Market sentiment continues to be undermined by global recession fears. Central banks’ pursuit of increasingly aggressive interest rate hikes are stoking fears over economic growth.

The Federal Reserve is seen as being well ahead of the pack in this regard. The bank is expected to deliver another 75bps rate hike in July. Expectations for which are also underpinning the US Dollar this morning.

Pound US Dollar Exchange Rate Forecast: Fed Powell Testimony in the Spotlight

The Pound US Dollar exchange rate could face additional pressure this afternoon.

Fed Chair Jerome will testify before the Senate Banking Committee at 14:30 BST. His semi-annual testimony comes just days just a week after the Fed deliver its largest interest rate hike since 1994.

Powell is likely to be grilled on US inflation, which struck a 40-year high in May. The US Dollar may surge if Powell reiterates the Fed’s commitment to taming inflation is ‘unconditional’.

The focus GBP investors is now likely to shift to tomorrow’s PMI release. Will another larger-than-expected drop in service sector activity extend the Pounds losses?

Matthew Andrews

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