Pound US Dollar Exchange Rate News: GBP/USD Steady as UK Inflation Strikes Two-Year Low

February 13, 2019 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Steady as UK Inflation Strikes Two-Year Low

Pound (GBP) Exchange Rates Stall as UK Inflation Drops to Two-Year Low

The Pound US Dollar (GBP/USD) exchange rate traded in a narrow range on Wednesday morning as markets digested the UK’s latest Consumer Price Index (CPI).

According to data published by the Office for National Statistics (ONS), UK inflation slumped from 2.1% to 1.8% in January, falling below forecasts of a slightly more modest drop to 1.9%.

This resulted in inflation slowing to a two-year low, with the ONS attributing the fall to lower energy prices, which offset a rise in food, alcohol and transport costs at the start of 2019.

Most notably, this also puts inflation below the Bank of England’s (BoE) target range of 2-3% for the first time in two years, something that could dent the chances of a rate hike from the bank, even if the Brexit is resolved in a suitable manner.

However some analysts were more upbeat regarding the data, pointing out that the gap between wage growth and the rate of inflation continues to grow, providing consumers with more spending power.

Tej Parikh, senior economist at the Institute of Directors said:

‘For the past two years, households have been squeezed between high prices and weak wage growth. With inflation now at a two-year low and growing upward momentum in pay packets, consumers are likely to feel less of a pinch on their wallets.

‘This easing in the cost of living should provide some uplift for the High Street just as consumer confidence appears to be waning.’

At the same time, also suppressing movement in Sterling on Wednesday was the ongoing uncertainty surrounding Brexit.

Despite being only six-weeks out from when the UK is scheduled to officially exit the EU, there is still no deal in place for how the withdrawal will be handled, with this lack of clarity paralysing movement in the Pound.

US Dollar (USD) Exchange Rates Flat as Markets Await US CPI Figures

Meanwhile the US Dollar (USD) remained rangebound through the first half of Wednesday’s session as USD investors awaited the publication of America’s own CPI figures.

In the US inflation is also expected to have slowed at the start of the year, with the headline reading forecast to have plummeted from 1.9% to 1.5% in January.

However more likely to be in focus will be the accompanying core reading, where price growth is expected fall from 2.2% to 2.1% over the same period.

Lower inflation is likely to support the Federal Reserve’s adoption of a more cautious approach to monetary policy this year, something that may further dampen the appeal of the US Dollar.

Elsa Lignos, Managing Director at RBC Capital Markets said:

‘The US headline inflation dynamic is going to be weak in the first half of 2019 – but that is all down to energy prices. Underlying that, core inflation should actually be pretty firm (our economists note demand is strong, evidenced by strong chain-store sales and very healthy income growth).

‘The Fed has explicitly said it can wait as long as inflation is under control – so stronger inflation supports a less dovish outlook and stronger US dollar.’

GBP/USD Exchange Rate Forecast: Robust US Retail Sales to Lift the Greenback?

Looking past the release of the US CPI figures, the Pound US Dollar (GBP/USD) exchange rate may fall back on Thursday as the US releases its latest retail sales figures.

Economists forecast that US retail sales growth may have remained positive in December, with a third consecutive month of gains potentially offering some support to the US Dollar.

Meanwhile, barring any major developments in Brexit GBP investors will be focused on the release of the UK’s own retail sales figures in the second half of the session.

Friday’s figures may offer some modest support to Sterling if sales growth is shown to have rebounded in January as forecast.

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