Pound US Dollar (GBP/USD) Exchange Rate Wavers as UK Inflation Hits 40-Year High

July 20, 2022 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Wavers as UK Inflation Hits 40-Year High

GBP/USD Exchange Rate Trades Sideways on Combined Headwinds

The Pound US Dollar (GBP/USD) exchange rate is trading in a narrow range so far today, as Pound (GBP) investors digest a higher-than-expected UK inflation release while the US Dollar (USD) struggles for support amid a risk-on market mood.

At the time of writing, GBP/USD is trading at $1.2009, up slightly from today’s opening levels.

Pound (GBP) Wobbles Following CPI Release

The Pound (GBP) has weakened against several peers today, even though high inflation ordinarily boosts currencies on hopes of aggressive policy tightening from central banks.

June’s annualised consumer price index printed at a fresh 40-year high of 9.4%, exceeding the 9.3% expected: the increase was largely driven by rising costs of food and petrol. While core inflation fell for a second month, it remains well above pre-pandemic levels.

Sterling downside may be driven by cost-of-living concerns, which remain in the spotlight as prime ministerial candidates compete to tempt voters with promises of financial support. Liz Truss, one of the forerunners, has stated she will reverse the rise in national insurance tax if she is elected.

Also fuelling downbeat sentiment may be uncertainty regarding the Bank of England (BoE)’s next move. Governor Andrew Bailey said yesterday that a half-point rate hike was ‘on the table’ for August, but ‘not locked in’.

Amid forecasts of 12% inflation later in the year, it seems likely that the BoE will come under increasing pressure to review its mandate of ‘gradual policy tightening’. Outgoing policymaker Michael Saunders commented earlier in the week:

‘Rather than focus on a precise forecast for Bank Rate over the next year, the key point is that the tightening cycle may (in my view) still have some way to go.

With excess demand and elevated inflation, 'too little, too late' would increase the likelihood that recent trends in underlying pay growth, longer-term inflation expectations and firms' pricing strategies become more firmly embedded.’

US Dollar (USD) Succumbs to Risk-On Headwinds

The safe-haven US Dollar is tumbling against several of its rivals this morning as risk-on trading sentiment saps appeal.

An equity rally in the Asian session helped boost market morale, alongside positive news for Europe: reports suggest that Russian energy supplies to Europe via the Nord Stream pipeline will resume, following fears from European officials that Russia would cease to trade gas.

Reuters confirms that gas flows are likely to restart on Thursday after the completion of scheduled maintenance, but at lower than its full capacity, according to Russian sources.

‘They (Gazprom) will return to the levels seen before July 11,’ a spokesperson is cited as saying.

Capping upbeat sentiment somewhat, China has reported over 1000 Covid cases for the first time since 20 May.

Fresh restrictions could limit China’s manufacturing capacity and negatively affecting trade, the prospect of which is limiting markets’ optimism. If such fears escalate, overall market mood could turn sour, lending renewed support to the ‘Greenback’.

However, continually reducing bets of a 100bps rate hike from the Federal Reserve may still cap USD gains.

The likelihood of a full point hike stood at 90% last week but fell to 30% following the release of America’s Michigan consumer sentiment survey, which revealed that long-run inflation expectations declined to 2.8% in July from 3.1% in June.

GBP/USD Exchange Rate Forecast: US Data to Print Mixed?

Looking ahead, US data will likely drive movement in the Pound US Dollar exchange rate tomorrow, given a lack of significant economic releases from the UK.

Initial jobless claims are expected to have fallen by 4 thousand last week compared with the week previous, potentially boosting the ‘Greenback’ – on the other hand, the Fed manufacturing index is forecast to reveal stagnation in the month of July.

If the data prints as expected, USD trading could be mixed; although risk sentiment may also influence trading, with widespread risk-off flows likely to support the currency.

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