Pound US Dollar (GBP/USD) Exchange Rate Surged on Mini-Budget U-Turn Hopes
(Updated 16:00, 13/10/22) The Pound US Dollar (GBP/USD) exchange rate surged today on hopes of mini-budget reversals. Rumours picked up steam of Prime Minister Liz Truss preparing to scrap further tax cuts from the mini-budget, in the hope to undo some of the damage to the economy the mini-budget caused. At the time of writing, GBP/USD is trading at $1.1218, up 1.05% from this morning’s low of €1.109.
Looking ahead, GBP investors will be waiting with bated breath if Truss is to announce any further changes to the disastrous mini-budget. Chancellor Kwasi Kwarteng has since dismissed any reversals, but sources close to 10 Downing Street say otherwise. Speaking ahead of the meeting with Kwarteng, IMF Head Kristalina Georgieva alludes to potential U-turns, that it is sometimes correct for a ‘re-calibration of policies’ if the situation calls for it:
‘I do believe it is correct to be led by evidence, so if the evidence is that there has to be a re-calibration, it is right for governments to do so. Don’t prolong the pain – make sure actions are coherent and consistent.’
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Pound US Dollar (GBP/USD) Exchange Rate Wavers amid Persistent Hawkish Fed
The Pound US Dollar (GBP/USD) exchange rate is trading narrowly after hawkish FOMC minutes reaffirmed the Fed’s commitment to bringing inflation down.
At time of writing, the GBP/USD exchange rate is around $1.1094, relatively unchanged from this morning’s opening levels.
US Dollar (USD) Quiet Ahead of CPI Reading
The US Dollar remains relatively subdued this morning after a turbulent Wednesday. Markets are now focused on the release of the US Bureau of Labor Statistics CPI data for September later today.
Expectations of a further softening of annual inflation to 8.1% from 8.3% but remains high. Driven by a fall in gasoline prices, investors have priced in at least another 75bps rate hike expectation. Core CPI, excluding volatile prices such as food and energy, is expected to rise again. If forecasts prove true, an uptick in core CPI to 6.6% would be a new forty-year high.
Providing further support to the US Dollar came last night with the release of the Federal Open Market Committee (FOMC) minutes. A continued hawkish rhetoric kept investors’ buoyed as the Fed remains focused on bringing inflation down. However, the minutes also noted that the pace of tightening is set to slow.
Pound (GBP) Undermined by Economic Instability
Meanwhile, the Pound (GBP) remains under pressure from both political and economic headwinds.
The Bank of England (BoE) confirmed it will end its emergency bond-buying scheme tomorrow as planned. Before rumours of an extension were quashed by the BoE, the Pound climbed on renewed optimism. BoE Chief Economist then lent considerable support to Sterling when he said that significant policy response will still be needed in November.
Investors will be eagerly waiting for Chancellor Kwasi Kwarteng’s fiscal plan, as well as the OBR forecasts. After insurmountable pressure, Kwarteng agreed to bring the publication forward from its original November date. The market will be keen to hear how his and Liz Truss’ ‘Growth Plan’ could reduce surging debt without substantial spending cuts.
Elsewhere, Kwarteng is set to meet with International Monetary Fund (IMF) leaders in Washington today. Kwarteng remains under intense pressure to reverse his mini-budget that caused extensive market meltdowns. Any further U-turns from the controversial unfunded tax measures could see Sterling boosted.
Pound US Dollar Exchange Rate Forecast: US CPI Inflation to Bolster Rate Hike Bets?
Looking ahead, all eyes will be on the release of US inflation data for September. An expected second month of softening inflation could temper rate hike bets. But with ever-increasing core inflation, the Fed’s job is far from over.
Meanwhile, political instability is denting the confidence of both GBP investors and just about everyone. Any further developments on the financial stability of the UK could cause further Pound volatility.