Pound US dollar (GBP/USD) exchange rate hits three-month high as US inflation cools

Pound US dollar (GBP/USD) exchange rate spikes amid cooler-than-forecast US inflation

Article updated 13:48, 12/6/2024

The pound US dollar (GBP/USD) exchange rate is climbing this afternoon, following a surprise cooldown in US headline inflation.

Markets had anticipated that headline US inflation would have held at 3.4% in May. However, the reading cooled to 3.3%, indicating that the consumer price index is continuing to decelerate.

Because of this, markets began to bet that the Federal Reserve would have to begin unwinding its monetary policy sooner than expected.

Furthermore, it may prompt the Fed to be more dovish in its communication tomorrow.

At the time of writing, GBP/USD is trading at around US$1.2841, a rise of just under 0.8% from today’s opening rates.

Original article continues below:

Pound US dollar exchange rate static as UK economy stagnates

The pound US dollar exchange rate is trapped in a narrow range this morning, amid news of stalling UK economic growth.

At the time of writing, GBP/USD traded at around US$1.2758, showing little movement from the morning’s opening rates.

Pound (GBP) muted by stalling economic activity

The pound (GBP) is under pressure this morning, as markets react to the latest UK GDP data, released this morning.

In April, the UK economy stagnated as markets had forecast. This marks a clear slowdown in activity when compared to the reading of 0.4% growth in March.

Wet weather was cited as a key reason, as it curtailed construction and retail activity across the country. However, as the UK’s economy remains fragile, the data is still proving concerning to investors.

Hailey Low, associate economist at the National Institute of Economic and Social Research, commented:

‘Today’s subdued GDP figures signal that the UK remains fragile on its route to a sustained economic recovery. However, the broader perspective remains an economy grappling with stagnation as low productivity and high economic inactivity curtails growth potential.’

However, Sterling is remaining underpinned by continually pared back Bank of England (BoE) interest rate cut bets. Although the UK economy is on a knife-edge, inflation remains persistent.

US dollar (USD) quiet ahead of US inflation data

The US dollar (USD) is trading in a narrow range this morning, as markets await the latest US inflation data.

Headline inflation is forecast to have remained at 3.5% in May. Meanwhile, core inflation is expected to have cooled from 3.6% in April to a reading of 3.5%.

This could inject renewed turbulence in USD exchange rates this afternoon. While the core reading looks set to continue ticking lower, when taken with a sticky headline rate it suggests persistent inflation.

Analysts at ING commented that:

‘CPI has been running hotter than the Fed’s favoured measure of inflation, the core PCE deflator, for quite some time. We suspect it will come in at 0.3% MoM once again, which remains too hot, but so long as the core PCE deflator is 0.2%, we believe we remain on course for a Fed rate cut as soon as September.’

This may prompt speculation that the Federal Reserve will keep interest rates unchanged for longer, which could strengthen USD.

Pound US dollar exchange rate forecast: Fed guidance in focus

Looking ahead for the US dollar, tonight’s Federal Reserve interest rate decision is likely to induce some volatility.

While the Fed is expected to keep interest rates unchanged, investors are waiting on how its forecasts for rate cuts is shaping up. At the last meeting, three cuts were expected this year.

Since then, and as is likely to be shown this afternoon, inflation has been more persistent than anticipated. Because of this, markets are expecting the Fed to be less aggressive in its rate cutting cycle.

With this in mind, hawkish forward guidance from the Fed could catapult the ‘greenback’ this evening.

For the pound, data releases are set to thin out in the short term. This is likely to leave GBP exposed to shifts in the market mood.

As an increasingly risk-sensitive currency, bearish trade in the wake of a hawkish Fed could weaken Sterling significantly.

John Mulcahey

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