Pound US Dollar (GBP/USD) Exchange Rate Falls Off a Cliff as UK Inflation Eases

Pound US Dollar (GBP/USD) Exchange Rate Plummets on Waning UK Price Pressures

The Pound US Dollar (GBP/USD) exchange rate shot down by close to 2% over the course of last week, depressed by easing consumer inflation in the UK. While Wednesday’s release indicated that living costs are becoming more bearable, it also suggests that the Bank of England (BoE) may dial back its pace of interest rate hikes.

At the time of writing, GBP/USD is trading at $1.2853, having fallen by over 1.8% in the past seven days.

Pound (GBP) Weakens as UK Inflation Ticks Lower

The Pound (GBP) suffered a considerable blow on Wednesday last week, as UK inflation dropped by more than forecast: from 8.7% in May to 7.9% in June.

Ahead of the release, a lack of significant data in the first half of the week exposed the Pound to losses. Political jitters in the UK subdued GBP exchange rates, as it seemed likely that the Conservative party would lose seats in the upcoming by-elections.

Midweek, attention turned to inflation: Sterling fell sharply against the US Dollar (USD) and several other peers immediately as the data was released, as aggressive policy tightening from the BoE seemed struck off the cards.

In publishing June’s report, the Office for National Statistics (ONS) said:

‘Inflation slowed substantially to its lowest annual rate since March 2022, driven by price drops for motor fuels. Meanwhile, core inflation also fell back after hitting a 30-year high in May.’

GBP morale recovered falteringly in the second half of the week, with a better-than-expected increase in UK retail sales buoying the currency against several peers on Friday. On the other hand, political volatility weighed on investor sentiment, with the Tories losing two of three seats in Thursday’s by-elections.

US Dollar (USD) Buoyed by Risk-Off Mood, Jobless Claims

The US Dollar enjoyed an uptrend against its rival currencies last week as a risk-off mood boosted the safe-haven currency. Later in the week, signs of a tighter-than-expected US labour market lent further support to the ‘Greenback’.

USD trading was subdued on Monday as US Treasury bond yields came under pressure and the New York Empire State Manufacturing Index for July failed to impress. Into Tuesday, US data continued to disappoint, with retail sales and industrial production missing forecasts.

Midweek, however, USD soared amid widespread risk-off sentiment: tensions between the world’s two largest economies – the USA and China – sparked bearish trading amongst investors. On Thursday, Xie Feng, China’s ambassador to the US, warned that his country would not flinch from US provocation.

Antagonism between the two countries mounts as the US has imposed restrictions on China’s chip sector while attempting to counter the country’s growing influence in the Indo-Pacific.

Also buoying the US Dollar on Thursday was a better-than-expected jobless claims release. The number of Americans filing for unemployment benefits fell by 9000 in the week ending 15 July, prompting expectations for further interest rate hikes from the Federal Reserve.

Rubeela Farooqi, chief U.S. economist at High Frequency Economics, commented: ‘The claims data show that the labor market remains resilient and businesses have yet to start shedding workers at a rapid pace, despite five percentage points of tightening.’

GBP/USD Exchange Rate Forecast: Fed Decision in Focus

The Pound US Dollar exchange rate could fall further still next week, if the Federal Reserve strikes a hawkish tone on Wednesday accompanying its interest rate decision.

The central bank has been relatively dovish recently, keeping interest rates on hold at its last policy meeting in June. However, the Fed is widely expected to hike this time around, bringing interest rates to their highest level since 2001.

In the meantime, weak UK PMI data is likely to cap Sterling gains on Monday; although an increase in business optimism according to Tuesday’s data may help to boost GBP. On Friday, a fall in the core PCE price index could depress the ‘Greenback’, helping GBP/USD to recover some of its losses.

Olivia Evershed

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