Pound US Dollar (GBP/USD) Exchange Rate Climbs as Headline CPI Eases Further than Expected
The Pound US Dollar (GBP/USD) exchange rate is strengthening this morning in the wake of annualised UK inflation softening to 10.5%. Despite a second consecutive month of easing inflation, the level remains close to 40-year high.
At time of writing, the GBP/USD exchange rate is around $1.2333, a 0.40% jump from this morning’s opening levels.
Pound (GBP) Buoyed by Bolstered Rate Hike Bets
The Pound (GBP) is finding mixed success this morning against its rivals after consumer price inflation eased for the second straight month to 10.5%. Matching expectations but falling slightly from November’s 10.7%, CPI remains one of the highest levels in 40 years.
The biggest drivers for this softening were fuel prices, as average petrol prices fell by 8.3 pence per litre between November and December. However, prices continued to rise in the hospitality sector as accommodation and food showed the strongest increase since 1991. Food and non-alcoholic beverages saw a 16.8% increase YoY, the biggest increase since 1977.
Despite a softening, the market expects the Bank of England (BoE) to raise interest rates for the tenth consecutive time. Further rate hike expectations could be boosting Sterling today, as Chancellor of the Exchequer Jeremy Hunt remains committed in bringing inflation down. He added:
‘High inflation is a nightmare for family budgets, destroys business investment and leads to strike action, so however tough, we need to stick to our plan to bring it down.’
US Dollar (USD) Undermined by Pared Fed Rate Hike Bets
Meanwhile, the US Dollar is struggling for demand as the markets are expecting a slowdown in Federal Reserve rate hikes.
With underwhelming data of late, and easing inflation, the ‘Greenback’ has experienced choppy trade with expectations of it slowing its aggressive rate hike cycle. Cooling inflation has finally given the central bank room to slow its tightening, much to the dismay of investors. Expectations of a modest 25bps rate hike are all but baked in at the next policy meeting.
Elsewhere, a relatively risk-on market mood has further sapped demand for the safe-haven US Dollar. Improvements in China have spurned a risk-averse mood as the country continues its reopening. USD Investors will be keeping an eye on the latest retail sales and PPI data later today for more proof that the Fed will be slowing down.
Pound US Dollar Exchange Rate Forecast: US Data to Sour the Greenback Further?
Looking ahead, the Pound US Dollar exchange rate could see more daylight between the pair with the release of both PPI and retail sales data for the US. Expected declines in both could see Fed rate hike bets pared even further. Easing price pressures and a flagging retail sector could indicate that the current aggressive rate hike cycle might be coming to an end.
Meanwhile, the Pound will be left trading on market sentiment in the aftermath of the UK’s latest inflation report. However, ongoing industrial action and concerns over the economic stability of the UK could sour investors’ buoyant mood.