Pound US Dollar (GBP/USD) exchange rate weakens as UK inflation holds
The Pound US Dollar (GBP/USD) exchange rate is falling this morning, as UK inflation came in softer than expected.
At the time of writing, GBP/USD is trading at around US$1.2539, a drop of just over 0.4% from the morning’s opening rates.
Pound (GBP) drops as inflation holds
The Pound (GBP) is falling this morning, as inflation printed at a softer level than markets had anticipated.
Economists were anticipating an increase across both headline and core rates, where they actually printed below forecasts. The headline consumer price index for January held at 4%, while core CPI similarly remained at 5.1%.
This is sparking bets that the Bank of England (BoE) will begin to cut interest rates from May, as inflation continues to soften in key areas.
Citing factors such as a freeze in fuel duty, Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, commented:
‘We continue to think that CPI outturns over the coming months will convince the MPC in the second quarter that monetary policy does not need to be quite as “restrictive” as it is currently, though it looks like a toss-up whether the committee will opt to cut bank rate for the first time in May or June.’
However, a risk-on market mood may be preventing the Pound from fully bottoming out against its peers, due to its increasingly risk-sensitive nature.
US Dollar (USD) trims post inflation gains
The US Dollar (USD) is receding against some peers this morning, as a risk-on trade dampens the safe-haven currency.
On the back of hotter-than-expected inflation, the ‘Greenback’ climbed as markets eyed hawkish action from the Federal Reserve. The Fed has consistently indicated that market expectations of interest rate cuts are too soon.
Peter Cardillo, Chief Market Economist at Spartan Capital Securities, commented:
‘If this keeps up with another month or two of inflation staying high, you can kiss a June (rate cut) goodbye and we’re probably looking at September. It’s a hotter-than-expected report and it’s part of what the Fed has been alluding to when it says it’s too early to say that inflation has been beaten.’
However, the morning’s bullish trade is weighing on the US Dollar due to its safe-haven nature. As markets move towards riskier assets, USD is being side lined as investors await further impetus.
Pound US Dollar exchange rate forecast: UK economic contraction
Looking ahead, the core catalyst of movement for the Pound is likely to be tomorrow’s UK GDP data, reflecting growth in Q4.
On a quarterly basis, the economy is forecast to have contracted by 0.1%, suggesting the UK entered a technical recession. If true, this may weigh significantly on the Pound.
For the US Dollar, the primary driver of movement is likely to be tomorrow’s retail sales data, reflecting January’s activity.
Sales are forecast to have fallen by 0.1% on a monthly basis, which could weaken the ‘Greenback’ by suggesting falling consumer spending. As the US economy is consumption based, this may worry USD investors and prompt a sell-off.