Pound US Dollar (GBP/USD) Exchange Rate Rallies as US CPI Misses Forecasts
(Updated 15:45, 12/4/23) The Pound US Dollar (GBP/USD) exchange rate leapt higher this afternoon after the US consumer price index showed a sharper-than-expected cooldown in American inflation.
Headline inflation in the US eased from 6% to a near two-year low of 5% last month, lower than the expected 5.2%.
The US 🇺🇸 inflation rate is now at the lowest level since May 2021.
Chart: @tEconomics#Inflation • #CPI • #Economy pic.twitter.com/zXiQdcL2Lm
— Klāvs GO Markets (@KlavsGOMarkets) April 12, 2023
US core inflation ticked higher, from 5.5% to 5.6%, as expected. However, economists pointed out that this was likely due to lagging wage and rent inflation, which are also showing signs of moderating.
Following the data release, markets scaled back bets on further interest rate increases from the Federal Reserve. This sparked a selloff in the US Dollar (USD).
Meanwhile, the Pound (GBP) enjoyed support following a speech from Bank of England (BoE) Governor Andrew Bailey. Speaking to the Institute of International Finance, Bailey indicated that the recent turmoil in financial markets has not spooked UK rate setters in their battle to bring down inflation. The BoE chief said:
‘What we have not done – and should not do – is in any sense aim off our preferred setting of monetary policy because of financial instability. That has not happened.’
Furthermore, Bailey reiterated that the UK banking sector remains strong:
‘Today I do not believe we face a systemic banking crisis. When I look at the UK banks, they are well capitalised, liquid and able to serve their customers and support the economy.’
These comments seem to suggest that the BoE will press ahead with raising interest rates, if UK inflation remains uncomfortably high.
Unlike in the US and the Eurozone, British inflation has failed to cool sharply this year. Headline inflation currently stands at 10.4%, having held mostly above 10% since July 2022.
Next week, the UK’s March inflation release is expected to ease to 10.2% – still well above 5% in the US, 6.9% in the Eurozone, and the BoE’s 2% target.
At the time of writing, GBP/USD is trading at $1.2471, up 0.6% from a low hit earlier today.
Attention now turns to the Federal Open Market Committee’s (FOMC) meeting minutes this evening. Could dovish signals from the Fed see GBP/USD climb even higher?
Original article continues below:
Pound US Dollar (GBP/USD) Exchange Rate Falls Ahead of American Inflation
The Pound US Dollar (GBP/USD) exchange rate slipped this morning as markets get ready for the latest US consumer price index.
At the time of writing, GBP/USD is trading at $1.2418, marginally down on the day.
Pound (GBP) Stumbles amid Northern Ireland Tensions
The Pound (GBP) slipped against the US Dollar (USD) this morning as investors remain cautious ahead of high-impact events on the data calendar for today.
GBP investors may also be anxious about the political tensions in Northern Ireland, as US President Joe Biden visits the island of Ireland to coincide with the 25th anniversary of the Good Friday agreement.
Relations between unionists and nationalists are severely stained in Northern Ireland due to disagreement over the post-Brexit trading arrangement. The Democratic Unionist Party (DUP) has boycotted power-sharing at Stormont in protest over the Northern Ireland Protocol, with many analysts worried that the dispute will reopen bitter divisions in the region.
Some commentators had hoped that Biden could apply some political pressure to help restore power-sharing, but DUP figures have publicly criticised the President as ‘anti-British’ and ‘pro-republican’.
Events in Northern Ireland could have larger implications for the UK, including UK-EU trade relations and the fabric of the union as a whole. As a result, these jitters may be denting Sterling today.
US Dollar (USD) Muted as Traders Await Inflation Reading
Meanwhile, the US Dollar’s upside could be limited as USD investors hold back from placing aggressive bets ahead of this afternoon’s inflation data.
With the Federal Reserve potentially nearing the end of its interest rate hiking cycle, March’s inflation reading could have a significant impact on Fed rate setters’ decision-making. This morning, many USD traders are opting to stay on the side-lines until closer to the data release.
GBP/USD Exchange Rate Forecast: Fed and BoE Speculation to Drive Volatility?
Looking ahead, the Pound US Dollar exchange rate could see significant movement this afternoon as markets gauge the likelihood of more interest rate rises from the Bank of England (BoE) and the Federal Reserve.
First up is the US CPI. Economists expect headline inflation to have eased sharply, although they see core inflation ticking higher. If the release reveals signs that underlying inflation remains sticky, increased Fed bets could lift the US Dollar. However, if inflation continues to rapidly cool then decreased bets may dent USD.
Shortly after the American inflation data, BoE Governor Andrew Bailey is due to speak. In recent weeks, Bailey has boosted the Pound by signalling the possibility of another interest rate rise at the bank’s meeting next month. If the BoE chief reiterates this today, it could lend Sterling further support.
However, GBP may find its movement somewhat limited ahead of the UK’s latest GDP reading due out tomorrow morning. Forecasters expect the British economy to have expanded 0.1% in February, but investors may be hoping that the reading will exceed forecasts for the second consecutive month.
Later this evening, the Federal Open Market Committee (FOMC) meeting minutes are due out. If Fed policymakers sounded cautious at last month’s rate decision, following the collapse of several US banks, then the ‘Greenback’ could face headwinds.