Pound US Dollar (GBP/USD) Exchange Rate Surges Higher on Softer US Inflation
(Updated 16:20, 13/12/22) The Pound US Dollar (GBP/USD) exchange rate skyrocketed this afternoon after softer-than-expected US inflation data saw markets reprice the US Dollar (USD).
Headline US inflation eased from 7.7% to 7.1%, its fifth consecutive slowdown and lower than market forecasts of 7.3%. Core inflation also eased, cooling from 6.3% to 6%, versus the estimated 6.1%.
Tuesday’s release was the latest sign that American inflation has peaked and it comes ahead of the Federal Reserve interest rate decision on Wednesday. It is now almost certain that the Fed will slow its pace of policy tightening, which in turn triggered a sell-off in the US Dollar.
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Pound US Dollar (GBP/USD) Exchange Rate Rangebound as UK Unemployment Rises
The Pound US Dollar (GBP/USD) exchange rate is lacking support this morning, as the latest unemployment rate rose to 3.7% in October.
At the time of writing the GBP/USD exchange rate is trading at around $1.2267, which is virtually unchanged from this morning’s opening rate.
Pound (GBP) Stalls as Jobs Data Darkens UK’s Economic Outlook
The Pound (GBP) is muted against the majority of its peers this morning. The UK’s unemployment rate has risen, stoking recession fears and leaving GBP on the back foot.
The latest unemployment rate from the Office of National Statistics (ONS) printed as expected, rising from 3.6% to 3.7% in the three months to October. This has left many investors concerned about the approaching recession.
Meanwhile, real wages are falling as wage growth lags behind rising inflation. This is currently underpinning the UK’s worsening economic outlook, as cost-of-living and recession pressures continue to mount.
In response to the data, Chancellor Jeremy Hunt has said the UK faces ‘difficult decisions’. As workers strike for better pay amid the cost-of-living crisis, the government has pushed back, arguing that pay rises could further stoke inflation.
US Dollar (USD) Gains Capped as Investors Await Inflation Data
The US Dollar (USD) is finding its upside limited this morning as US investors trade cautiously ahead of the all-important US inflation data this afternoon.
Headline inflation is expected to fall from 7.7% to 7.3% in November. If true, USD could face headwinds as easing inflation supports the Federal Reserve’s plans to slow interest rate hikes.
The Fed has been vocal about slowing rates if data supports the move. The US inflation rate therefore has the potential to determine whether the Fed hikes by 50bps or 75bps tomorrow evening.
This is causing investors to trade cautiously this morning, as they wait for inflation to give them a clearer picture of the Fed’s next move. As such, USD is finding its upside limited.
Pound US Dollar Exchange Rate Forecast: UK inflation to Lift GBP?
Tomorrow, the UK inflation release will likely drive the Pound US Dollar pair.
The consensus is that headline inflation will drop from 11.1% to 10.9% in November. If true, this could support the Pound as easing inflation alleviates cost-of-living concerns somewhat. However, easing inflation takes pressure off the Bank of England (BoE) to keep raising rates, so GBP could see some mixed movement.
Elsewhere the BoE’s interest rate decision could impact GBP. A 50bps hike has been priced in for Thursday’s meeting. However, investors will be focusing on comments made to indicate potential policy decisions in 2023.
Turning to the US, the Fed’s interest rate decision will be in focus tomorrow. Markets have priced in a 50bps hike. If the Fed deviate from this in any way, USD could fluctuate. Otherwise, investors will focused on the Fed policy roadmap for 2023.