Pound US Dollar Exchange Rate News: GBP/USD Softens as Inflationary Pressures Weigh on Market Mood

July 21, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Softens as Inflationary Pressures Weigh on Market Mood

Pound (GBP) Slips amid Bleak Economic Outlook

The Pound (GBP) is under pressure today as soaring inflation continues to weigh on the UK economy. After yesterday’s hotter-than-expected CPI inflation, soaring prices to both fuel and food are set to continue to weigh on the UK economy.

With worrying figures released today further highlighting the soaring inflationary pressures threatening to trigger a recession. Data revealed that the UK government borrowed £22.9bn in June, much higher than the £12.5bn expected. Ruth Gregory, senior UK economist at Capital Economics said:

‘June’s public finances figures provided more evidence that the government’s fiscal position is worse than the OBR predicted back in March.

This may limit the ability of the next Prime Minister to provide more relief for households when a further rise in CPI inflation from 9.4% in June to around 12% in October worsens the cost-of-living crisis.’

Elsewhere, political uncertainty is persisting, potentially weighing on the Pound. The Conservative and UK leadership race has reached the penultimate stage, as Rishi Sunak and Liz Truss have reached the final two.

The winner will replace Boris Johnson as Prime Minister, but not until September 5. With such contrasting fiscal policies between the two candidates, investors remain cautious as a clear direction for the UK economy is still some way off. As both candidates vie for the wider Tory party’s votes, investors will remain focused on how they intend to steer the UK out of economic turmoil.

US Dollar (USD) Regathers Strength as Safe-Haven Flows Resume

The US Dollar (USD) is firming today as global recession fears resume, weighing on market sentiment and opening doors to safe-haven currencies. Reduced odds on a 100bps rate hike from the Federal Reserve could be capping further demand for the ‘Greenback’.

Amid soaring global inflation, led by the UK’s latest higher-than-expected CPI reading for June, is souring market mood. Growing risk-off sentiment is helping support the US Dollar as risk-sensitive currencies are seeing demand sapped.

However, limiting any further gains is the US Dollar’s negative correlation to the Euro, with the market focused on the European Central Bank’s (ECB) interest rate decision. With market forecasts expecting a rate hike for the first time since 2011, a bold 50bps hike could sap demand for the ‘Greenback’ demand. However, a smaller rate raise could provide a modest tailwind instead.

Elsewhere, President Joe Biden has declared his intentions in speaking to Chinese President Xi over the current sanctions in place with China. A potential lifting of sanctions placed on Chinese imports could alleviate some of the inflationary pressures on American consumers.

GBP/USD Exchange Rate Forecast: Poor UK Retail Sales to Weigh on the Pound?

Looking forward to the rest of the day, the US Dollar could see further support with the release of initial jobless claims. Expectations of unemployment benefits are expected to drop by more than 4000. A strong labour market lends support to further rate hikes, lifting the US Dollar.

Elsewhere, the Pound will be left to the souring market sentiment as data remains thin on the ground until Friday. Retail sales for the month of June will be released. An expected continued fall in sales is likely to weigh on Sterling.

Meanwhile, political uncertainty is likely to cap any gains as Johnson’s replacement isn’t going to take office until September.

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TAGS: Pound Dollar Forecasts