GBP/USD Exchange Rate Firms as UK Data Prompts Rate Hike Hopes
The Pound US Dollar (GBP/USD) exchange rate is climbing this morning as markets digest soaring inflation in the UK. In the year to July, inflation rose to 10.1% rather than 9.8% as expected – the highest reading since February 1982.
At the time of writing, GBP/USD is trading at $1.2107, up slightly from today’s opening levels.
Pound (GBP) Wavers as Inflation Hits Fresh 40-Year High
The Pound (GBP) is trading in a mixed range against its peers following the release of July’s annualised inflation data. While the higher-than-expected reading encourages more aggressive monetary policy tightening from the Bank of England (BoE), the prospect of an imminent recession complicates the path ahead.
Suren Thiru, economics Director for the Institute of Chartered Accountants in England and Wales, comments:
‘With inflation soaring, another half-point interest rate rise in September is very much on the table. However, with the looming recession likely to help bring down inflation, the case for continuing to tighten monetary policy should diminish.’
Economists elsewhere foresee a similar outlook. Jake Finney, economist at PwC, remarks:
‘We expect today’s CPI data to add to existing pressure for the Bank to act more decisively, perhaps by increasing its headline policy rate by 50 basis points in its next meeting in September.’
In practical terms, the higher-than-expected inflation reading reflects the difficulties facing households experiencing a fall in real wages. Rising food prices had the biggest impact on annual inflation rates between the last two readings – a reality that will hit poorer families hardest as food spending represents a larger proportion of their income.
With energy bills also set to soar above £4,200 this winter, there is plenty to keep consumer morale low.
US Dollar (USD) Trades Broadly Higher as Rise in Sales Predicted
The US Dollar (USD) is trending up against the majority of its peers, buoyed by a risk-off market mood and expectations for a rise in retail sales.
Markets turned cautious this morning following yesterday’s varied trading conditions and amid geopolitical tensions and central bank policy divergence. While the Federal Reserve maintains a fairly hawkish rhetoric, other banks such as the BoE are hesitant to commit to aggressive rate hike policies.
In the European afternoon, July sales data is expected to reveal a 0.1% rise in sales – a negligible uptick but preferable to stagnation or contraction. In June, sales at gasoline stations recorded the biggest increase.
Potentially capping sales-inspired gains is the fact that any rise in spending is predominantly fuelled by higher prices rather than an increase in volumes bought.
Later in the session, the Fed will release the minutes from its latest policy meeting. Developments in the interim between the meeting and the minutes’ release could lessen the impact of the publication, although traders will be scouring policymakers’ comments for new insights.
GBP/USD Exchange Rate Forecast: US Data to Influence Trading?
Looking ahead, US retail data and the FOMC minutes are likely to drive movement in the Pound US Dollar exchange rate.
In the meantime, GBP/USD may fluctuate as markets digest the implications of this morning’s UK inflation data. If traders focus upon a potential policy tightening response from the BoE, the exchange rate could tick up higher.