Pound US Dollar (GBP/USD) exchange rate slips amid hotter-than-expected US inflation

Pound US Dollar (GBP/USD) exchange rate falters as US inflation comes in hot

Article updated 16:40, 13/2/2024:

The Pound US Dollar (GBP/USD) exchange rate is slipping this afternoon, in the wake of the latest US inflation data.

In January, both core and headline inflation rates were hotter than initially expected, with core inflation holding at 3.9%. The headline rate cooled less than expected, decelerating to 3.1 from 3.4%.

This is sparking bets that the Federal Reserve will have to keep interest rates unchanged for longer than expected, strengthening the US Dollar. According to CME’s FedWatch tool, the odds of a May rate cut have fallen to 40%, when this was previously considered the most likely option.

At the time of writing, GBP/USD is trading at around US$1.2603, a fall of roughly 0.2% from the morning’s opening rates.

Original article continues below:

Pound US Dollar (GBP/USD) exchange rate supported by forecast-beating UK labour data

The Pound US Dollar (GBP/USD) exchange rate is on the march this morning, following the UK’s latest slate of labour data.

At the time of writing, GBP/USD is trading at around US$1.2668, an increase of just over 0.3% from the morning’s opening rates.

Pound (GBP) rises amid better-than-expected labour data

The Pound (GBP) is strengthening this morning, following the release of forecast beating UK labour data.

Average earnings excluding bonuses cooled less than anticipated during December, with wage growth cooling to 6.2%. As a key inflationary pressure, growth remaining above inflation, and cooling less than expected, is prompting revised interest rate cut bets.

Furthermore, the UK unemployment rate unexpectedly ticked downward in December, suggesting a robust labour market. Both data sets are prompting investors to push back their expected start date for any interest rate cuts.

Analysts at Nomura commented that:

‘We think the Bank of England (BoE) will likely continue to wait for a bit longer before it begins its cutting cycle, owing to heightened uncertainty and volatility over labour market and inflation data, opting for a “delayed reaction function” as Ben Broadbent has previously indicated.’

Because of this, the Pound is rising amid growing expectation that the BoE will keep rates held as they are for longer.

US Dollar (USD) calm ahead of US inflation data

The US Dollar (USD) is trading quietly this morning, as investors look ahead to this afternoon’s inflation data.

In January, both headline and core consumer price indexes are anticipated to have cooled. If the data prints in line with these expectations, it may ignite Federal Reserve interest rate cut bets and weaken USD.

Last Friday, the CPI for December was revised to a lower level, indicating that inflation is continuing to cool. With this in mind, the expectation is building that the Fed will cut rates sooner than expected.

Undermining USD this morning are dovish comments from President of the Atlanta Fed Raphael Bostic from yesterday. In an interview, he commented on falling inflation and rate cuts, stating that:

‘If that were to continue, I’d be open to pulling it forward more. The things that we’re seeing today are not head fakes, but rather, are really enduring and robust and true to where the economy is.’

Pound US Dollar exchange rate forecast: accelerating UK inflation to boost GBP?

Looking ahead for the Pound, tomorrow brings the release of the latest batch of inflation data. In January, economists are expecting that both core and headline rates will have accelerated, with the latter rising to 4.2%.

If this occurs, the Pound may strengthen as investors adjust their bets on the timing of BoE rate cuts. Signs of persistent inflation may delay these beyond the expected August start.

This is followed on Thursday by the latest UK GDP data. In Q4, the UK economy is expected to have contracted by 0.1% on a quarterly basis. This is likely to spark renewed recession concerns and weaken the Pound.

For the US Dollar, the core catalyst of movement is likely to be Thursday’s retail sales data release. In January, sales are expected to have dropped by 0.1% on a monthly basis, which could weaken the ‘Greenback’.

John Mulcahey

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