Pound US Dollar (GBP/USD) Exchange Rate Strengthens amid Peaking UK Inflation
The Pound US Dollar (GBP/USD) exchange rate is firming this morning, as UK inflation appears to have peaked.
At the time of writing, GBP/USD is trading at around US$1.2391, an increase of roughly 0.3% from the morning’s opening rates.
Pound (GBP) Firms as Inflation Appears to Have Peaked
The Pound (GBP) is firming this morning, as the latest inflation data for the UK points to cooling inflation.
Headline inflation has fallen from 11.1% to 10.7%, with core inflation showing a smaller drop from 6.5% to 6.3%. Analysts believe that UK inflation has peaked or has at least shown firmer signs of doing so, bringing modest support to GBP.
However, GBP’s gains may be capped as the cost-of-living crisis remains a focus. While inflation has peaked, the benefits are unlikely to filter down to households in the short term. As such the UK’s economy remains on the backfoot.
This was explained further by Tom Stevenson, Investment Director for Personal Investing at Fidelity International. He stated:
‘Inflation has almost certainly peaked now, with the year-on-year comparisons likely to keep the headline rate of price rises falling from here. However, a lower rate of inflation does not mean a fall in the cost of living and that will continue to squeeze the UK economy through 2023.’
Similarly, industrial action across the UK may be capping Sterling’s gains, with postal and rail workers striking. With further action scheduled, the UK economy may suffer while workers continue to fight for better treatment and pay.
US Dollar (USD) Softens as Investors Await Fed Decision
The US Dollar (USD) is ticking downward this morning, as investors await the latest interest rate decision from the Federal Reserve.
With yesterday bringing a fall in both headline and core inflation, the Fed’s recent dovish pivot has gained more support. As such, investors are anticipating a modest 50bps rate hike this evening, and a continual easing of tightening policy.
As impactful data is thin on the ground ahead of this evening, investors are remaining cautious. The onus remains on what accompanies the Fed’s decision, and how they frame the fight against inflation.
Pound US Dollar (GBP/USD) Exchange Rate Forecast: Central Banks in Focus
Looking ahead for the Pound, tomorrow brings the latest interest rate decision from the Bank of England (BoE). With a 50bps hike priced in, investors will be paying close attention to the meeting minutes which follow the decision.
With the UK’s economic situation remaining gloomy, news of inflation peaking may bring an optimistic tilt to the BoE’s minutes. However, should they mention the possibility of slowing rate hikes, GBP may weaken.
For the US Dollar, beyond the Federal Reserve’s interest rate hike this evening, tomorrow brings retail sales data for November. A sharp decline from 1.3% to -0.1% is expected, which could drag the ‘Greenback’ down. However, a surprise uptick could reflect a resilient US economy, and provide room for further rate hikes leading to a stronger US Dollar.