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GBP USD Exchange Rate Under Pressure as UK Inflation Fails to Accelerate

August 15, 2017 - Written by Frank Davies

Investors were not impressed by the latest UK consumer price index data, leaving the Pound US Dollar exchange rate on a sharp slump.

As inflation unexpectedly held steady at 2.6% on the year in July this further undermined bets that the Bank of England (BoE) could still raise interest rates before the end of the year.

Signs continued to point towards inflationary pressure losing its earlier momentum, with CPI easing -0.1% on the month to diminish the pressure on BoE policymakers to consider any imminent action.

While this weaker showing does bode well for UK households, which have faced an increasing earnings squeeze in the wake of the Brexit vote, this was not enough to shore up the Pound.

Further volatility is likely in store for GBP exchange rates tomorrow, though, with the release of the latest raft of UK labour market data.

Of particular interest will be the average weekly earnings figure for the three months to June, which is forecast to show no change in the pace of wage growth on the year.

As James Smith, economist at ING, commented:

‘But what matters for the Bank of England is wage growth. We expect this to hold steady at 2% tomorrow, and in fact, for much of the rest of this year. The combination of slowing economic momentum, political uncertainty and rising import costs mean that firms are likely to have limited incentive to accelerate pay rises.

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‘While today's data will continue to test the patience of some BoE hawks, we expect the committee as a whole to continue 'looking through' inflation spikes in favour of slower growth. We don't expect a rate hike this year.’


If wage growth shows some improvement, however, this could offer the GBP USD exchange rate a fresh rallying point, even if the prospect of any BoE rate hike remains distant.

Softer Brexit Speculation Fails to Boost GBP



Speculation over Brexit has also impacted the Pound this week, with renewed market jitters encouraged by a proposal that the UK should remain part of the customs union for an unspecified period after its formal departure from the EU.

This sparked fresh hopes that a softer form of Brexit could be on the cards, although this was not enough to outweigh the disappointing inflation data in the minds of investors.

As researchers at Deutsche Bank noted:

‘As a whole, the weekend’s developments are consistent with our baseline scenario that a political/economic crisis will be necessary to force the UK into an EEA-style + customs agreement transitional agreement. The Conservative Party remains divided on the Brexit endgame and over the political costs involved. May’s authority has been undermined after the election, and the Prime Minister is unlikely to be strong enough to force the issue one way or another.’


So long as Brexit-based uncertainty continues to hang over the UK economy the GBP USD exchange rate could struggle to find any particular upside momentum.

US Dollar Remains Bullish in Spite of Easing Global Tensions



Even though global geopolitical tensions showed some signs of easing after the weekend, with neither the US or North Korea escalating their rhetoric further, this failed to particularly dent the US Dollar.

While safe-haven demand diminished somewhat the general appeal of the ‘Greenback’ remained bearish, with markets encouraged by the latest comments from a Federal Reserve policymaker.

New York Fed President William Dudley took a more hawkish tone on Monday, expressing confidence in the health of the US economy and indicating that he could vote in favour of a third interest rate hike coming before the end of the year.

Even so, any imminent rate hike remains dependent on continued signs of strength from the US economy, putting the emphasis back on domestic data releases.

The GBP USD exchange rate could come under greater pressure if this afternoon’s advance retail sales figure demonstrates a rebound on the month.

As long as consumer confidence appears to be on the up once again this should offer further support to the bullish US Dollar.
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