Pound US Dollar (GBP/USD) Exchange Rate Fluctuates Following US Inflation Data
(Updated 16:34 12/01/23)
The Pound US Dollar (GBP/USD) exchange rate saw some volatile movements over the course of the day, but has since settled back into a narrow range. The currency pair briefly touched three-week highs following the latest US inflation data. The figures confirmed the first drop in US inflation since May 2020, with markets scaling back bets on further interest rate hikes from the US Dollar.
Comments from Fed policymaker Patrick Harker reinforced this view. Harker signaled that the central bank would likely be shifting to 25bps rate hikes at future meetings.
The exchange rate’s gains were short-lived, however. The cautious market mood saw GBP/USD erase the majority of its gains. Additionally, an above-forecast downturn in US jobless claims pointed to a still tight labour market. This helped to prop up market expectations of aggressive action from the Fed.
James Knightley, chief international economist at ING, said:
‘US inflation shows price pressures are easing, yet in an environment of a strong jobs market, the Federal Reserve will be wary of calling the top in interest rates. A 25bp hike in February is likely with a further 25bp in March. Inflation will slow even more meaningfully in 2Q though, with the prospects for 2H rate cuts looking strong as recession bites hard.’
At time of writing the GBP/USD exchange rate is at around $1.2162, virtually unchanged from this morning’s opening figures.
Original article continues below:
Pound US Dollar (GBP/USD) Exchange Rate Trades Narrowly
The Pound US Dollar (GBP/USD) exchange rate is edging higher today. The pairing may be benefitting from a subdued US Dollar (USD) ahead of key US inflation data later today. Positive reports from the UK’s retail sector may also be bolstering GBP/USD.
On the other hand, a risk-off mood may be keeping pressure on the exchange rate today.
At time of writing the GBP/USD exchange rate is at around $1.2175, virtually unchanged from this morning’s opening figures.
US Dollar (USD) Subdued Ahead of Key Inflation Data
The US Dollar (USD) is seeing limited trade ahead of key inflation data later today. A cautious market mood may be lending support to the safe-haven ‘Greenback’ and limiting any drastic losses. A downturn in US Treasury bond yields may be weighing on USD however.
The US Dollar may also be seeing losses by expectations of a less aggressive path of policy tightening from the Federal Reserve, however.
Today’s inflation data is expected to add to other signs that inflation is cooling. Wage growth figures last week already prompted a pullback in Fed rate hike bets.
The US Dollar may be seeing its losses limited by recent hawkish comments from Fed policymakers, however. Speaking on Monday, Fed board member Raphael Bostic signalled that the central bank’s interest rate would need to be held above 5%.
Pound (GBP) Firms amid Positive Signs from UK Retailers
The Pound (GBP) is edging higher against its rivals today. Sterling may be seeing its gains capped by a risk-off market mood, however.
Positive profit reports from the UK retail sector may be pushing the Pound higher today. Retailers including Tesco and Marks & Spencer have posted better-than-expected profits for the festive period today.
The optimism may be short lived however, with industry heads warning that they expected customers to ‘tighten their belts’ in 2023.
The Pound may also be finding support today from recent hawkish comments by Bank of England (BoE) Chief Economist Huw Pill.
Speaking on Monday, Pill signalled that inflation in the UK could remain higher for longer than expected. Markets may be taking these comments as signals that the BoE may push ahead with further interest rate hikes.
GBP/USD Exchange Rate Forecast: Will Softer US Inflation Prompt Fed Rate Hike Bet Pullback?
Looking ahead, the latest US inflation data could pull USD lower if Decembers figures print as forecast. December’s rate is expected to cool to 6.5% which see markets pare back their bets on more aggressive Fed action.
On the other hand, the latest US jobless figures today could help to cushion any losses for USD. The data is forecast to remain close to previous weeks, pointing to a tight labour market.
A speech from Fed policymaker Patrick Harker on Friday could prompt further movement in the US Dollar. Fed policymakers have been hawkish in recent weeks despite evidence of cooling inflation.
Finally for the US Dollar, an uptick in January’s consumer sentiment could lend support to USD if the data prints as forecast.
The Pound will see no significant data releases today. Sterling could be affected by profit reports from the retail sector, as well as any developments regarding further strikes.
On Friday, November’s GDP data could see the Pound drop if it prints as forecast. The figures are expected to confirm a contraction in the UK’s economy after October’s surprise rebound.
Also on Friday, a forecast downturn in industrial production could also weigh on Sterling.