Pound US Dollar Exchange Rate Rises Post-PPI, Dips on GBP Weakness
(Updated 16:45, 11/08/2022) The Pound US Dollar (GBP/USD) exchange rate has traded in a mixed range through today’s session, as both currencies have faced headwinds.
The main data in the spotlight was the US producer price index: which printed below forecasts at 9.8% in the year to July. This represented a greater-than-expected drop in inflation, which subdued USD investors on reduced hopes of aggressive monetary policy tightening from the Federal Reserve.
So far, the Fed’s mandate has been to hike interest rates consecutively, by large amounts, to bring inflation under control. Markets worry that if prices are already beginning to soften, policymakers may decide there’s little need to continue with rate increases.
A further sign that US inflationary pressures may be slowing is a fall in the price of gasoline. The national average price for regular unleaded petrol dropped below $4 per gallon to $3.990 today, from above $5 in June.
Taking cues from today’s data, the ‘Greenback’ trended lower against its peers – but a downtrend in the Pound brought the exchange rate back down in the European afternoon.
Dampening Sterling support, a meeting between Chancellor Nadhim Zahawi, business secretary Kwasi Kwarteng and the bosses of several large energy companies did not yield any clear resolution, as utility firms pledged vaguely to ‘do more to help the people who most need it’.
Zahawi said of the meeting:
‘In the spirit of national unity, [industry leaders from the electricity sector] agreed to work with us to do more to help the people who most need it.’
Addressing the lack of clear commitments, Boris Johnson, also in attendance, said it would be for his successor to make significant fiscal decisions.
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GBP/USD Exchange Rate Rebounds Following Overnight Losses
The Pound US Dollar (GBP/USD) exchange rate is trending moderately higher this morning following a dip during the Asian session. The US Dollar (USD) is unable to sustain tailwinds and is falling as investors consider an aggressive September rate hike to be less likely.
At the time of writing, GBP/USD is trading at $1.2220, virtually unchanged from today’s opening levels.
US Dollar (USD) Recovers on Federal Reserve Comments
The US Dollar staged a rebound last night against the majority of its peers as comments from the Federal Reserve bank may have helped to lift USD sentiment.
President of the Federal Reserve bank of Minneapolis, Neel Kashkari, said that yesterday’s slower-than-expected US inflation reading was ‘welcome’ but did not alter his expectation that the Fed would need to raise interest rates to 3.9% by the end of 2022.
The central bank is ‘far, far away from declaring victory,’ Kashkari commented; ‘we have to get back to 2% inflation.’
Even though further aggressive rate hikes could push the US economy into a recession, the Fed official said that he would not be deterred by that risk.
Supporting Kashkari’s message is a similar statement from the San Francisco Federal Reserve’s Mary Daly. In an address to the Financial Times, Daly said:
‘There’s good news on the month-to-month data that consumers and business are getting some relief, but inflation remains far too high and not near our price stability goal.’
Since these comments were released, the ‘Greenback’ has dipped once again, possibly subdued by a fresh risk-on mood.
Pound (GBP) Firms Overall on Stronger Risk Appetite
The Pound (GBP) is trading broadly higher against its rival currencies at the time of writing, supported by a fresh risk-on impulse.
The cost-of-living crisis remains in focus and caps more significant gains for the currency. Lending an upside to Sterling, however, may be hopes of progress in today’s meeting between energy companies and government officials.
Chancellor Nadhim Zahawi and business secretary Kwasi Kwarteng are expected to meet with utility bosses in Downing Street to discuss solutions to the forecast spike in energy bills this winter.
Speaking ahead of the meeting, a representative from the Treasury said all options were being kept open:
‘We are keen to work on options soon so that decisions on the next steps can be made swiftly by the next PM/administration.’
Furthermore, Zahawi told reporters he wanted to challenge energy companies, asking whether they are making the investment necessary to help their customers.
Weighing upon Sterling and limiting gains for the currency are worries over the global economic downturn and geopolitical tensions between the US and China. The Bank of England (BoE)’s downbeat forecast for the end of this year also dampens GBP support, as policymakers predicted a prolonged recession beginning in Q4.
Pound US Dollar Exchange Rate Forecast: US PPI Data to Influence Rates?
Looking ahead, this afternoon’s PPI inflation data may affect the Pound US Dollar (GBP/USD) exchange rate. The US producer price index is expected to print at 0.2% – a decrease from last month’s 1.1%.
If producer prices are shown to have eased alongside consumer prices, USD could sink on renewed fears of a more dovish Fed. Hawkish rhetoric from the central bank could cap losses, however.
Elsewhere, if a risk-on mood persists, the Pound could continue to climb despite a lack of significant data. The outcome of today’s energy meeting may also affect GBP due to its implications for the cost of living.