Pound US Dollar (GBP/USD) Exchange Rate Strikes 10-Month Low as Soft UK Inflation Sinks BoE Rate Hopes

July 18, 2018 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Strikes 10-Month Low as Soft UK Inflation Sinks BoE Rate Hopes

The Pound US Dollar (GBP/USD) exchange rate struck a new 10-month low this morning, as investors well left dismayed by the UK’s latest inflation figures.

Pound (GBP) Exchange Rate Collapses as Inflation Fails to Lift

The Pound slumped in trade this morning, with markets shunning the beleaguered currency once again following the publication of a weaker-than-expected Consumer Price Index (CPI).

According to data published by the Office for National Statistics (ONS) this morning, the UK’s inflation rate held at a one-year low of 2.4% in June.

This is the third consecutive month in which inflation has held at 2.4% and comes in well below forecasts of a jump to 2.6% last month.

The ONS attributed the disappointing reading to an unexpectedly sharp fall in prices for both clothing and games, with the drop offsetting a forecast rise in fuel and energy costs.

Most importantly however is how today inflation figures could impact the Bank of England’s (BoE) rate decision next month.

Markets had up until the start of this week’s session, priced in around an 80% chance that policymakers would vote to raise interest rates in August.

However this has been shaken by this week’s lacklustre inflation and wage growth figures as well as the growing discontent within Westminster.

Some analysts are now forecasting that the BoE will be forced to once again rethink its path of monetary tightening, resulting in the bank staying its hand again in August, much to the disappointment of GBP investors
Neil Wilson, chief market analyst at Markets.com, said:

‘The Bank of England's policymakers seem to be guiding a hike and the market has quietly acquiesced but data this week does not support the case for an imminent raising of rates.’

‘My bet is the Bank will - as in May - be forced by softer data to be forced away from raising rates too quickly.’

The soft inflation reading comes at a particularly trying time for the Pound as it also faces selling pressure due to the recent political turmoil in the UK, particular in regards to the growing divisions over Brexit within the Tory party.

US Dollar (USD) Exchange Rate Bolstered by Hawkish Remarks From Powell

The US Dollar (USD) continues to strengthen this morning after roaring higher on Tuesday following an upbeat economic assessment from the chair of the Federal Reserve, Jerome Powell.

The remarks came as part of Powell’s congressional testimony in front of the Senate Finance Committee in which he forecast the US economy was on track to enjoy steady growth for the foreseeable future.

Peter Cecchini, chief market strategist at Cantor Fitzgerald in New York said:

‘He reiterated the view of the economy as being strong, growing at a solid pace with recent inflation data as more or less encouraging.’

Powell also appeared dismissive of the potential risks of a US-China trade war and reinforced his view that the Fed would need to continue to gradually raise interest rates, further buoying sentiment in the Dollar.

GBP/USD Exchange Rate Forecast: Can UK Retail Sales Offer Some Respite for Sterling?

Looking ahead, GBP investors will be clinging to hopes that tomorrow’s UK retail sales figures can offer some much needed relief for the Pound US Dollar (GBP/USD) exchange rate.

Current forecasts aren’t looking hopeful however, with economists predicting that sales growth may have slowed from 1.2% to just 0.2% in June, although with the sweltering summer heat and the start of the World Cup possible spurring consumers to spend more there are hopes that sales could beat forecasts.

In the meantime the US Dollar may continue to press higher this afternoon as we go into day two of Powell’s congressional testimony, with the USD exchange rate likely to be lifted by another more bullish remarks from the Fed Chair.

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