Pound US Dollar (GBP/USD) Exchange Rate Revisits Monday’s Levels on Bearish USD Trading

August 9, 2022 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Revisits Monday’s Levels on Bearish USD Trading

GBP/USD Exchange Rate Firms, Drops as UK Headwinds Escalate

The Pound US Dollar (GBP/USD) exchange rate rose initially through today’s session as upbeat UK retail data buoyed the Pound (GBP), but subsequently fell on cost-of-living pressures. Meanwhile, US Dollar (USD) investors were bearish ahead of Wednesday’s CPI release.

At the time of writing, GBP/USD is trading at $1.2091, virtually unchanged from today’s opening levels.

US Dollar (USD) Succumbs to Pressure Ahead of CPI Release

The US Dollar trended broadly lower against its peers on Tuesday, as investors refrained from placing bullish bets ahead of Wednesday’s inflation release.

US headline CPI is forecast to have fallen in July - although core inflation is expected to print at 6.1%. In the case of the former, declining oil prices and recession fears have dented economists growth outlook.
Tomorrow’s data is significant in that it is likely to influence the Federal Reserve’s September interest rate decision.

Current expectations are mixed, as a stronger-than-expected nonfarm payrolls release last week buoyed forecasts of a sharp interest rate hike but signs the US economy is slowing cap market optimism. Last month, US GDP was revealed to have declined for a second consecutive quarter.

Deutsche Bank observed that Monday’s survey from the New York Fed showed consumers’ overall inflation expectations fell steeply in July. One analyst commented:

‘That'll be music to the Fed’s ears, since if that trend continues then it means that the Fed may not have to be so aggressive in hiking rates. One of their big fears is that higher inflation expectations will lead to a self-fulfilling prophecy of higher actual inflation.’

Pound (GBP) Wavers on Mixed Trading Stimuli

The Pound traded in a mixed range through the European morning, enjoying limited tailwinds on account of the British Retail Consortium’s retail sales monitor for July.

The BRC’s release printed at 1.6% rather than -1.1% as expected, representing the first increase in sales in five months. Sales of summer clothing, electric fans and picnic food were observed to have boosted consumer spending.

Gains were capped, however, as the UK head of retail at the advisory firm KPMG warned:

‘Conditions [are] set to get tougher as consumers arrive back from summer breaks to holiday credit card bills, another energy price hike and rising interest rates. With stronger cost of living headwinds on the horizon, consumers will have to prioritise essentials.’

Various experts speculated that July’s release may represent the ‘lull before the storm’, given the Bank of England’s forecast of a recession in Q4 and inflation rising above 13.3%.

Increasing pressure on GBP, the afternoon brought forecasts that UK energy bills could top £4,200 from January 2023. Consultancy Cornwall Insight suggested that bills could hit £4,426 in the Q2 next year, before falling.

Amid such high price pressures, BoE deputy governor Dave Ramsden signalled that the central bank would likely raise rates further to tackle inflation:

‘We know that what we’re doing is adding to an already very challenging environment. But our assessment is we needed to act forcefully to ensure that inflation doesn’t become embedded.’

Ramsden also cautioned that an ‘inflation mentality’ poses hazards to the economy.

GBP/USD Exchange Rate Forecast: US Inflation to Drive Movement?

Looking ahead, tomorrow’s US consumer price index is likely to dominate movement in the Pound US Dollar exchange rate tomorrow.

If headline CPI falls, the ‘Greenback’ could slide as rate hike bets would likely reduce. On the other hand, less aggressive monetary policy tightening could help to limit the likelihood of a recession.

Meanwhile, a lack of significant UK data leaves Sterling to trade on external factors. If risk appetite improves, GBP could firm against its peers – ongoing cost-of-living concerns may limit Pound appeal, however.

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