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Pound US Dollar (GBP/USD) Exchange Rate Skyrockets as Risk Appetite Improves

July 18, 2022 - Written by John Cameron

Pound-to-US Dollar-rate-

GBP/USD Exchange Rate Catapulted by Renewed Risk Appetite

The Pound US Dollar (GBP/USD) exchange rate has shot to a one-week high today as risk-on sentiment boosted the Pound (GBP) while the US Dollar (USD) was subdued by a lack of significant data and dwindling bets of a 100bps interest hike this month.

At the time of writing, GBP/USD is trading at $1.2022 up 1.3% from today’s opening levels.

Pound (GBP) Buoyed by Risk-On Tailwinds

The Pound is enjoying bullish risk flows today, which are helping investors to overlook fears of a recession and geopolitical tensions, along with the UK’s heated leadership contest.

This week is packed in terms of UK data releases, so Sterling traders also look forward to plenty of trading stimuli. Furthermore, it is hoped that strong inflation data midweek will encourage the Bank of England (BoE) to hike interest by 50bps at its next meeting.

The BoE’s Governor Andrew Bailey suggested three weeks ago at the Sintra Forum that the bank will not necessarily have to act ‘forcefully’ to get inflation under control; his comments were reiterated by incoming policymaker Swati Dhingra.

Dhingra intimated that the Bank of England should move very gradually to tighten monetary policy, because the economy appears to be slowing faster than previously thought.

Yet this dovish approach risks inflation becoming entrenched – and economists hope that an eye-watering CPI release midweek will demonstrate this risk to BoE policymakers. The UK’s consumer price inflation data is expected to print at 9.3% on an annualised basis in June.

Additionally, retail sales and PMIs may have some impact. As higher inflation exacerbates the UK’s cost-of-living crisis, sales in June are expected to have fallen by 0.3%.

Michael Saunders, who leaves the Monetary Policy Committee (MPC) in August, has commented in favour of more aggressive interest rate hikes:

‘In broad terms, the MPC has to balance the risks and costs of tightening ‘too much, too soon’ versus ‘too little, too late’. In my view, the cost of the second outcome – not tightening promptly enough – would be relatively high at present.’

US Dollar (USD) Weakened by Downbeat Fed Expectations

Like the Pound, the US Dollar is losing strength on suspicions that the Federal Reserve bank may backtrack on its previously aggressive monetary policy stance.

Also weighing upon the ‘Greenback’ are risk-on headwinds, which sap the currency’s safe-haven appeal. Following a week of bearish trading, USD is now correcting down against several of its peers.

As signs of weakening emerge in the US economy, investors begin to worry that the US central bank will strike a more dovish tone next week at its policy decision meeting. One of the reasons for this concern is a fall in inflation expectations – the factor that initially prompted the Fed to hike more aggressively.

Friday’s University of Michigan consumer sentiment index revealed this decline, which saw the probability of a 100 basis points rate hike in July drop below 30% from nearly 90% earlier in the week.

The index reported that consumers see inflation running at 2.8% over a five-year horizon, the lowest in a year and down from 3.1% in June.

According to Reuters, their one-year outlook for price increases moderated to 5.2% from 5.3% a month earlier and was the lowest since February.

As the Michigan consumer confidence survey was a factor in determining the Fed’s June rate hike, it seems likely policymakers will take this month’s reading into account.

GBP/USD Exchange Rate Forecast: UK Employment to Influence Trading?

Looking ahead, tomorrow’s UK jobs report may influence the Pound US Dollar exchange rate.

The report is due to print mixed, recording an increase in May’s unemployment figure alongside a rise in average earnings (excluding bonuses) and the creation of 170K new jobs. This could cause either downside or upside, depending upon the data markets focus upon.

Elsewhere, speeches from both the Bank of England and the Federal Reserve could influence trading dynamics depending upon whether a hawkish or dovish tone is struck by either speaker.

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