Pound US Dollar (GBP/USD) Exchange Rate Consolidates Impressive Rally
(Updated 10:15, 14/07/23) The Pound US Dollar (GBP/USD) exchange rate is wavering close to a near 16-month high today as Sterling takes a breather at the end of an impressive week.
Since the start of this week’s session, GBP/USD has risen 3% to hit its highest level since late March 2022. The upside came as signs of rapidly cooling US inflation dented Federal Reserve rate hike bets, while hot UK wage growth supported expectations of more tightening from the Bank of England (BoE).
This saw the Pound US Dollar pairing hit $1.3142 overnight. Today it is wavering around that level and threatening to push even higher.
If the current risk-on mood – prompted by hopes of an end to the Fed’s tightening plans – persists, Sterling could climb higher against the safe-haven ‘Greenback’. However, concerns about rising global poverty could dampen the market mood.
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Pound US Dollar (GBP/USD) Exchange Rate Extends Upside as US PPI Misses Forecasts
(Updated 14:20, 13/07/23) The Pound US Dollar (GBP/USD) exchange rate continued to climb today, hitting a fresh 15-month high, after US wholesale inflation cooled more than expected.
In another sign that inflationary pressures are easing in the US, the latest PPI figures came in lower than expected. Year on year, PPI eased from a downwardly revised 0.9% to just 0.1%, below forecasts of 0.4%.
Coupled with yesterday’s cooler-than-forecast consumer price index, today’s PPI results are further fuelling expectations that the Federal Reserve may stop tightening monetary policy sooner than expected. This is weighing heavily on the US Dollar (USD).
Meanwhile, the Pound (GBP) may be finding its upside capped. Today, the Office for Budget Responsibility (OBR) published its fiscal risks and sustainability report.
Economist Paul Johnson, Director of the Institute for Fiscal Studies, says the report ‘does not make for cheerful reading’:
OBR fiscal risks and sustainability report does not make for cheerful reading.
Here they illustrate how rising inflation/interest rates have hit UK public finances much harder than other countries https://t.co/Iq61duAPAJ
— Paul Johnson (@PJTheEconomist) July 13, 2023
The report highlights how UK government debt has been far more vulnerable to rising inflation and interest rates than in other economies. This raises concerns about the health of the public finances, which could have implications for fiscal policy in the future.
At the time of writing, GBP/USD is trading at around $1.3099, up over 0.8% on the day.
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Pound US Dollar (GBP/USD) Exchange Rate Rises despite UK Economic Contraction
The Pound US Dollar (GBP/USD) exchange rate is trading at a 15-month high today after UK GDP beat forecasts, allowing Sterling to consolidate its recent gains.
At the time of writing, GBP/USD is at $1.3054, close to its highest level since April 2022.
Pound (GBP) Holds Firm despite Shrinking UK Economy
The Pound (GBP) is staying strong against the US Dollar (USD) today as better-than-forecast British data is helping to keep Sterling afloat.
According to the latest GDP report, the UK economy contracted less than forecast in May. Analysts had expected the growth rate to print at -0.3%, but instead it printed at -0.1%. The contraction was partly due to the extra bank holiday for the king’s coronation, which dented economic activity.
With the UK economy performing better than expected, it keeps the pressure on the Bank of England (BoE) to deliver an aggressive interest rate rise at its meeting next month.
Neil Birrell, Chief Investment Officer at Premier Miton Investors, commented:
‘As expected, the UK economy shrank in May, but not as much as expected. Admittedly, we are a month on from that now and the economy could be weaker still, but this would not have been the picture the Bank of England wanted to see.
‘With inflation still rife, this keeps the pressure firmly on the Bank to keep raising interest rates, putting even more pressure on the consumer in particular.’
Markets have been pricing in another 50bps hike amid stubborn inflationary pressures and record-high wage growth. Today’s GDP report is adding to these expectations, keeping Sterling strong against a struggling US Dollar.
US Dollar (USD) Remains Weak after Inflation Fall
USD’s weakness comes following yesterday’s consumer price index which showed that – unlike in the UK – US inflation continues to cool rapidly.
The headline inflation rate eased from 4% to 3%, its lowest level in over two years. Meanwhile, core inflation cooled from 5.3% to 4.8%.
The CPI figures saw USD exchange rates slump as markets repriced their expectations for future Federal Reserve interest rate rises. This is continuing to weigh on the US Dollar today.
Furthermore, the prospect of fewer Fed hikes has cheered markets, with the risk-positive trade further dampening demand for the safe-haven ‘Greenback’.
GBP/USD Exchange Rate Forecast: Weaker US PPI to See Sterling Hit New Highs?
Looking ahead, US data due out this afternoon could impact the Pound US Dollar pairing.
The latest US PPI is set to show a slight uptick in producer inflation month on month in June, after May’s decline, while the annual rate is set to ease sharply. If the data shows fresh signs that price pressures are cooling rapidly in the US, the ‘Greenback’ could come under further pressure.
At the same time, the most recent initial jobless claims figure is set to be published. Any signs that the US labour market is starting to slacken would likely dent USD.
As for the Pound, Sterling could remain underpinned by this morning’s better-than-expected GDP data. However, as analysts digest the report, any troubling elements about the UK’s economic outlook could dampen GBP’s appeal.
Risk appetite could also affect the GBP/USD exchange rate. If the market mood remains upbeat, the more risk-sensitive Pound could hold strong against the safe-haven US Dollar.