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Pound US Dollar Exchange Rate News: GBP/USD Softens amid Accelerated Rate Hike Bets for the Fed

July 14, 2022 - Written by John Cameron

US Dollar (USD) Buoyant on Increased Rate Hike Bets

The US Dollar (USD) is continuing its rally against most of its rivals today as expectations of aggressive Fed rate hikes have soared. The Bank of Canada (BoC) unexpectedly raised its interest rates by 100bps yesterday, boosting the possibility of the Fed raising interest rates higher than expected.

As investors weigh up the possibility of the Fed matching the aggression shown by the BoC, further support was lent to the ‘Greenback’ following yesterday’s increase in CPI. Inflation in the US climbed to a four-decade high of 9.1%, bolstering the expectations of an aggressive rate hike amid an increasingly gloomy global economic outlook.

Elsewhere, global recession fears continue to grow, and despite US inflation soaring, safe-haven flows continue to prop up the US Dollar. With the Ukraine crisis unrelenting, causing energy security fears in Europe, US Treasury Secretary Janet Yellen has called on world leaders to ramp up sanctions on Russia to curb their war effort and allay energy supply issues in Europe:

‘Russia's war in Ukraine causing negative spillover effects around the world, particularly on higher energy prices and rising food insecurity.

‘Price cap on Russian oil would limit revenues for Putin's war machine, help maintain global oil supply.’

Pound (GBP) Softens amid Political and Domestic Woes

The Pound (GBP) is encountering multiple headwinds today as a lack of data leaves Sterling vulnerable to domestic troubles.

Political uncertainty continues to weigh on the Pound this morning as Downing Street has confirmed that Boris Johnson will not be implementing new policies or making any major fiscal changes until he has been replaced. Despite confirmations of Boris Johnson staying on as caretaker PM until 5th September, investors grow concerned with the ongoing uncertainty surrounding the premiership.

Brexit issues remain in the peripheries as the Northern Ireland protocol bill is due to be completed and pass through parliament early next week. Sterling could come under increased pressure as a potential trade war with the EU is on the cards. As the EU has threatened to take legal action if the UK goes through with unilaterally altering the 2019 agreement.

As the ‘summer of discontent’ rolls on, the National Union of Rail, Maritime, and Transport Workers (RMT) have announced another nationwide strike. Planned for 27th July, the 24-hour walkout is in reaction to an ongoing pay dispute. Network Rail have offered its workers a pay rise of 4% this year, followed by another 4% next year, which has been branded as ‘paltry’ by the Union.

With the cost-of-living crisis worsening, unions around the country are arguing that wages are not keeping pace. Mick Lynch, RMT’s general secretary, said:

‘Strike action is the only course open to us to make both the rail industry and government understand that this dispute will continue for as long as it takes, until we get a negotiated settlement.

‘The offer from Network Rail represents a real-terms pay cut for our members and the paltry sum is conditional on RMT members agreeing to drastic changes in their working lives.’

GBP/USD Exchange Rate Forecast: US Data to Compound Inflationary Pressures?

Looking forward, a busy day for US releases as all eyes will be on the US PPI release later today. With PPI figures expected to remain high, substantial cost rises are on the horizon, pointing to worsening inflationary pressures.

Initial jobless claims data is to follow, and if the releases signal a continued resilient US economy, the 100bps rate hike could well be a possibility.

Elsewhere, data remains thin on the ground for the Pound for the rest of the week. Sterling could be left open to market sentiment alone, and a continuing souring sentiment could mean further slides.

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