Pound US Dollar Exchange Rate Muted as Investors Book Gains

November 18, 2021 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate Muted as Investors Book Gains

Pound US Dollar (GBP/USD) Exchange Rate Subdued Amidst Profit Taking

The Pound US Dollar (GBP/USD) exchange rate is trading within a narrow range today after GBP investors book some of their profits following yesterday’s post-inflation surge.

At time of writing the GBP/USD exchange rate is at around $1.3493 which virtually unchanged from this morning’s rates.

Pound (GBP) Gains Capped by Profit Taking

The Pound trended downward this morning as profit taking erased any gains made overnight, although the currency has since stabilised and is slowly climbing.

Markets may still be reacting to data from the UK yesterday that showed soaring inflation rates above expectation. Inflation rose to 4.2% in October from 3.1% in September, representing the highest level since November 2011.

A dramatic increase in gas and electricity prices are thought to be the main driver of the rise after UK regulator Ofgem lifted its cap on household energy bills, with further increases expected after the German government suspended its approval for the Nord Stream 2 gas pipeline on Tuesday.

Kallum Pickering of Berenberg Bank argued that the UK faces unique inflationary pressures compared to other countries:

They are driven by the combination of a rapid recovery in domestic demand, widespread global supply shortages as well as the UK’s unique Brexit challenges which raise the cost of trade with the EU, the UK’s biggest trading partner.’
‘The big upside surprise highlights the uncertainties as well as significant upside risks to the inflation outlook. The data strengthen the case for the BoE to begin its policy normalisation at the upcoming 16 December meeting already.’

Brexit may also cause headwinds for Sterling today, as fresh allegations from Denmark accuse the UK of breaching its post-Brexit fisheries deal. The UK government wishes to ban bottom trawling at the Dogger Bank conservation zone in the North Sea, an area that has been fished by Danish boats for centuries. This is coupled with the ongoing dispute between the UK and France over fishing rights.

US Dollar (USD) Unsteady as Investors Eye Interest Rate Hike

The US Dollar rose at the start of today’s European session but has since dipped slightly, as falling bond yields and expectations of a tightening of the Federal Reserve’s (Fed) monetary policy drives movement in USD.

Analysts believe that the Fed needs to raise interest rates sooner than expected in order to combat rising inflation coupled with a rapid fall in unemployment. Democratic economist Jason Furman feels that the Fed has fallen out of step with current economic developments:

A hot economy helps vulnerable workers the most. But a recession hurts vulnerable workers the most...Slowing inflation a little now could help obviate the need for even more drastic and painful steps in the future -- and reduce the chances of a future recession with the millions of jobs that could be lost.’

Investors expectations seem to line up with Furman’s views, as speculative bets on the dollar come ahead expected rate rises by the Fed in 2022. Strong US inflation data also added further fuel to these theories.

Wednesday also saw a number of speeches by members of the central bank’s board which may have influenced the US Dollar’s movements. Chicago Federal Reserve President Charles Evans has said that he is now less confident that inflation will recede next year, although his comments are still dovish when compared to other board members.

GBP/USD Exchange Rate Forecast: Upbeat UK Retail Sales to Boost Sterling?

Friday will bring October’s retail sales data for the UK which is forecast to rise from -0.2% to 0.5%. The rise is thought to be fuelled by consumers purchasing Christmas gifts early to avoid supply chain issues, and rising petrol prices.

Later today will bring US jobs data which is forecast to show a fall in unemployment. Jobless claims are expected to drop from 267K to 263K, which could drive further USD movement.

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