GBP/USD exchange rate extends uptrend following UK inflation release
The pound US dollar (GBP/USD) exchange rate continues to climb today following a higher-than-expected UK inflation reading. Headline inflation for the year to June printed at 2% rather than the 1.9% forecast, while core inflation exceeded estimates on a monthly basis.
At the time of writing, GBP/USD is trading at $1.3040, having firmed by almost 0.6% in the past 24 hours.
Pound (GBP) bolstered by inflation data
The pound (GBP) is trending higher against its peers, supported by the release of June’s inflation data. The release shows that inflationary pressures remain persistent in certain industries, including hospitality and tourism.
Given the higher-than-forecast reading, bets for a dovish monetary policy angle from the Bank of England (BoE) are retreating. Inflation in the service sector has prompted the BoE to keep interest rates on hold this far, and may continue to do so a while longer.
Cathal Kennedy, senior UK economist at RBC Capital Markets, observes: ‘If an August rate cut was ‘touch and go’ before this morning’s data then it’s even more so now.’
Echoing his sentiment, Deutsche Bank chief UK economist Sanjay Raja remarks: ‘We now think that an August rate cut is finely balanced. A lot will now depend on the strength of the May wage and unemployment data.’
Investors are pricing in a 35% chance that the central bank will cut interest rates in August – from 50% before inflation data was released. Signals from the BoE itself are mixed: Chief Economist Huw Pill recently told markets that the timing of the first rate cut remained an open question.
Yet some analysts attribute price pressures in hospitality to popular music artists touring the UK rather than inflated operating expenses. Taylor Swift’s ‘Eras’ tour presented an opportunity for hotels to cash in: two hotels surveyed by the Office for National Statistics (ONS) rose prices by over 100% in May, when the artist was performing nearby.
US dollar (USD) subdued despite retail surprise
The US dollar (USD) is sinking against its peers despite the release of better-than-expected retail data for the month of June.
Excluding autos, sales increased by 0.4% in June; up from 0.1% in May. On an annualised basis, retail activity increased by 2.3% rather than the 2.1% predicted. Bill Adams, chief economist at Comerica Bank, gave an optimistic statement:
‘The economy is in pretty good shape, there are signs of softness around the edges where low and moderate income consumers are pulling back … but openhanded spending by affluent consumers is keeping the economy as a whole moving forward.’
Nevertheless, monthly retail data was unchanged on a monthly basis with auto sales included, as consumers are purported to be focusing on basic needs rather than splashing out on bigger purchases. Analysts suggest that households may have run down the excess savings accumulated during the COVID-19 pandemic.
Moreover, the retail report has not altered expectations that the Federal Reserve bank will cut interest rates in September. Easing labour market conditions have helped to fuel rate cut bets, prompting investors to price in additional interest rate reductions in November and December.
GBP/USD forecast: exchange rate to fluctuate on Waller speech?
This afternoon, the pound US dollar exchange rate may respond to a speech from Fed Board of Governors member Christopher Waller. If Waller strikes a dovish note, his speech could reinforce expectations of an interest rate cut in September, dampening USD morale.
Into tomorrow, Sterling exchange rates are likely to trade according to UK employment data. Unemployment is expected to have remained unchanged in May, while the economy looks to have added 40K jobs after cutting 139K positions the previous month.
If the release prints as expected, GBP may firm – so long as the labour market isn’t considered to be cooling, the BoE are likely to face pressure to maintain restrictive monetary policy settings.