Pound v Dollar Exchange Rate Forecast Higher In Spite of UK Inflation Data

April 15, 2015 - Written by John Cameron

STORY LINK Pound v Dollar Exchange Rate Forecast Higher In Spite of UK Inflation Data

The main event in the global currency markets yesterday came in the UK with the publication of March’s headline Consumer Price Index data.

The consensus expectation amongst analysts was that the key-note year-on-year figure would once again show at zero per cent – the same as February’s result – and these expectations remained well-founded. However, the Pound Sterling (currency:GBP) still shipped support against the other sixteen most actively traded global currencies in the aftermath of the data thanks to a lower than anticipated showing from the Core CPI numbers. This version of the inflation measure is considered particularly important by economists – it gauges the price of less cyclical items in the basket of goods and services which the overall figure contains. These vital goods and services are the ones which every household depends upon and their prices are thought to have the most significant impact on aggregate spending decisions across the economy.

February’s Core CPI stood at a year-on-year 1.2% and a similar result was expected from yesterday’s March reading. The fact that the outcome showed a reduction in Core CPI to 1.0% hints that it is highly likely that the next set of British inflation figures, due for publication after the upcoming UK General Election in the middle part of May, will show that the domestic economy has slumped into deflation.

Such an outcome would hit the Pound Sterling hard at a time when it is likely to already be reeling from an uncertain UK General Election result. However, experts were far from negative regarding the medium-term prospects for the British unit. Rain Newton-Smith of the Confederation of British Industry commented yesterday that, ‘inflation should start to pick up in the second half of the year, especially as the downward pressure from lower oil prices eases’. Sterling may therefore enjoy a more go-ahead end to the year.

Elsewhere, the Pound Sterling recorded sustained gains against the US Dollar (currency:USD) during the latter part of yesterday’s session in spite of the mildly disappointing UK price rise figures. The trigger for the move higher in the GBP USD exchange rate was provided by yesterday afternoon’s US Advance Retail Sales data which showed at a below-expectation 0.9%. Analysts now forecast that investors may have to wait until its December meeting for the Federal Reserve to announce an interest rate hike.

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