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GBP to USD Exchange Rate Fluctuates on Rising UK Inflation

December 12, 2017 - Written by James Fuller

A higher than expected UK Consumer Price Index (CPI) report had little effect on the British Pound to US Dollar exchange rate on Tuesday. Investors of both currencies are anticipating key data and central bank news coming later in the week.

Following last week’s slip from 1.3475 to 1.3385, GBP/USD has continued to trend lower. On Tuesday morning the pair touched on a low of 1.3314 but generally trended near the level of 1.3350.

GBP Strength Limited Despite Higher UK Inflation

Britain’s November Consumer Price Index (CPI) report was published on Tuesday and came in higher than the analysts generally expected, but the Pound’s strength was limited.

Analysts forecast that UK inflation would improve slightly from 0.1% to 0.2% month on month and remain at 0.3% year on year, but the results came in at 0.3% and 3.1% respectively.

The higher than expected inflation indicated to some investors that Britain’s inflation may not have peaked yet after all, despite an interest rate hike from the Bank of England (BoE) in November.

This caused speculation that the Bank of England could be pressured into tightening UK monetary policy again some time in 2018.

However, other analysts did predict that inflation could reach 3.1% so the report was overall not shocking enough to cause a notable rise in hawkishness from Pound traders.

Analysts did note though that the Bank of England’s balancing act on inflation and the health of the UK economy remains highly difficult.

BoE Governor Mark Carney is not expected to send a letter to UK Chancellor Philip Hammond on why inflation has missed the government target until February 2018, which has limited Sterling appeal.

Overall, the picture on the Pound outlook remains heavily mixed, with some investors optimistic about the Brexit process while others are concerned about inflation and Brexit uncertainties.

According to Alex Lydall, head of dealing at Foenix Partners;

‘It seems the UK has taken one step forward in Brexit negotiations last week, then two back with inflation rising and pessimists rightly pointing out that stage one of negotiations complete pales in significance to the bumpy road ahead,’

USD Investors Anticipate Federal Reserve News

The US Dollar’s advances against the Pound have slowed this week, as investors are hesitant to continue buying the US Dollar until after Wednesday’s Federal Reserve policy decision.

Markets widely expect the Fed will hike US interest rates again in its December meeting, but the bank’s 2018 outlook remains clouded with uncertainty and this is limiting the US Dollar’s strength.

While the US Non-Farm Payroll report impressed last Friday, US wage growth failed to meet expectations, causing fresh concern about US inflation and wage trends.

As a result, traders are anxious that the Fed’s 2018 outlook could remain filled with uncertainty, or that the Fed may be less hawkish on the possibility of 2018 interest rate hikes than hoped.

GBP/USD Forecast: UK Job Market Report and Fed Decision Ahead

Wednesday will be a key session for the Pound to US Dollar exchange rate, as Britain’s key October job market results will be published and the Federal Reserve will hold its December policy decision.

Britain’s October job market data will include wage growth stats. The recently slow rate of wage growth coupled with strong UK inflation over the last year has concerned analysts and the Bank of England (BoE).

Traders may see some reactions from the Bank of England on Thursday when the bank holds its December policy decision. If the bank is more optimistic on Britain’s economy than expected, this could boost the Pound outlook.

The US Dollar, on the other hand, is likely to be influenced by the tone the Federal Reserve takes in its Wednesday decision.

If the bank hints at how many US interest rate hikes there could be in 2018, the US Dollar is likely to see stronger demand towards the end of the week and this will push GBP/USD lower.

However, if the bank indicates stronger concern on US inflation or wages, the US Dollar could weaken.

US inflation data from November, due on Wednesday afternoon, is likely to give investors a better idea of the tone the bank will take.
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