Pound US Dollar (GBP/USD) Exchange Rate Boosted by Falling US Inflation
(Updated 15:25, 10/8/22) The Pound US Dollar (GBP) exchange rate enjoyed a boost today after a fall in US inflation sparked a sell-off in the US Dollar (USD).
Headline inflation in America fell more than forecast in July, dropping dramatically from 9.1% to 8.5%. Month on month, inflation was flat.
Good news: The monthly inflation reading was flat in July. We haven't seen anything that low in over a year. (See chart)
There's hope US inflation has peaked, though a lot will depend on gas prices. pic.twitter.com/BBfxLDCg5U
— Heather Long (@byHeatherLong) August 10, 2022
In addition, core inflation held at 5.9%, rather than rising to 6.1% as was forecast.
The cooler reading suggests that US inflation may have peaked. It also takes some pressure off the Federal Reserve, which may now opt to slow its tightening cycle.
This in turn has cheered markets, which feared that aggressive rate hikes from the Fed could contribute to a global recession.
The US Dollar plunged 1% against the Pound (GBP), with GBP/USD hitting a ten-day high of $1.2242.
However, the upside could be short-lived. US inflation remains undesirably high and the Fed will likely continue raising interest rates to bring it back down to target.
Meanwhile, the UK faces political and economic turmoil as the Conservative leadership contest continues amid a looming recession. Pound Sterling may surrender its gains by the end of the week, particularly if Friday’s GDP data confirms the expected 1.3% contraction in the UK economy.
Original article continues below:
Pound US Dollar (GBP/USD) Exchange Rate Firms as Markets Brace for US Inflation Data
The Pound US Dollar (GBP/USD) exchange rate edged higher this morning as markets waited for the US inflation data before taking positions on the US Dollar (USD).
At the time of writing, GBP/USD is trading at around $1.2093, up from this morning’s low of $1.2069.
Pound (GBP) Ticks Higher as Government Hints at Support
The Pound (GBP) made a mild recovery this morning after some selling pressure overnight. The upside comes as the UK government tries to wrangle with surging energy costs, with household bills forecast to top £4,200 per year from January.
Rocketing energy bills have exacerbated the slump in living standards, which in turn threatens to hammer the UK economy. Yesterday, markets were concerned that the frontrunner in the Tory leadership campaign – Liz Truss – would not offer enough fiscal support to struggling households.
However, news that the government is prepared to act may be giving Sterling some support.
Tomorrow, Chancellor Nadhim Zahawi and Business Secretary Kwasi Kwarteng will meet with energy bosses to discuss the UK’s current energy-cost crisis. The Treasury is considering changes to the windfall tax after oil and gas companies reported record-breaking second-quarter profits.
Meanwhile, acting Prime Minister Boris Johnson has weighed in on the debate. Johnson said he was ‘absolutely certain’ that whoever wins the leadership contest will bring in more support measures. He added:
‘I just want you to know that I’m absolutely confident that we will have the fiscal firepower and the headroom to continue to look after people as we’ve done throughout.’
These developments seem to have given GBP investors some comfort today, lifting the Pound against a subdued US Dollar (USD). However, the upside may be fragile considering the UK’s economic headwinds.
US Dollar (USD) Quiet ahead of US Inflation Rate
Meanwhile, the US Dollar is muted ahead of today’s inflation data.
USD investors are refraining from making any significant trades as they wait for July’s inflation rate readings, which will be a significant factor in the Federal Reserve’s decision-making at its next meeting.
Economists expect headline inflation to ease but core inflation to rise as price pressures become broader.
If the inflation data prints hotter than expected, USD could soar. If it misses forecasts, then the ‘Greenback’ could fall.
With the potential for sharp movement either way, traders are understandably reluctant to take too strong a position ahead of the release.
GBP/USD Exchange Rate Forecast: US Inflation in the Spotlight
Of course, the US inflation rate reading is the focus today. As mentioned, it could help or hinder the US Dollar depending on whether it shows rising or cooling inflation.
The release will likely ripple out through markets. Prospects of further Fed rate hikes could dampen risk appetite, thereby hurting the Pound and other risk-sensitive currencies.