Pound US Dollar Exchange Rate News: GBP/USD Wavered as UK Inflation Hits Double Digits

August 17, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Wavered as UK Inflation Hits Double Digits

Pound (GBP) Surged on Fresh 40-Year High Inflation

The Pound (GBP) found considerable strength against most of its rivals in the wake of annual inflation rate surging beyond market expectations and hit 10.1% for the month of July. With market expectations of a 9.8% climb, still above the June’s reading of 9.4%, CPI leapt to double digits amid soaring food and energy prices.

Core inflation on the other hand, excluding volatile prices such as food and energy, still surged beyond forecasts and printed at 6.2% YoY for July. With the Bank of England (BoE) warning that inflation is set to peak at 13% by the end of the year, there are fears that that number could be hit earlier than expected.

The biggest driver for inflation has been food, with surging prices for cereals, bread, meat, dairy and vegetables. Restaurants and takeaway services have seen an increase in prices as food and drink inflation hits the highest since 2008. Another surge in CPI lends further credence to recession fears, in line with the warnings that the BoE issued.

With a spike in inflation, investors were buoyed at the prospect of further interest rate hikes from the Bank of England (BoE). The Pound could see further boosts as Debapratim De, Senior Economist at Deloitte, is confident of the BoE’s aggressive monetary policy:

‘With inflation above 10% and widely expected to rise further as energy bills increase, base interest rates look fairly low at 1.75%. We expect swift action from the Bank of England with the base rate potentially doubling by this time next year.’

Despite renewed hopes for further aggressive interest rate hikes, the underlying issue that will continue to weigh on the Pound is the worsening cost-of-living crisis. After wages fell to record lows amid an ever-widening gap with inflation, Unite General Secretary Sharon Graham has warned that inflation has reached ‘perilous levels’ for UK households. Graham said:

‘Yesterday, real wages fell to the lowest on record, so if today’s figures prove anything it’s that wages are not driving inflation.

‘Since the pandemic, the FTSE top 350 have seen profits soar by 43%. Britain has a profiteering crisis - when is something going to be done about that?’

US Dollar (USD) Held Moderate Strength amid Risk-Off Mood

The US Dollar (USD) remained resilient despite many investors awaiting key data released late on Wednesday, including the Federal Open Market Committee’s (FOMC) minutes from the last policy meeting, and any further hints at future rate hikes could see the ‘Greenback’ climb.

After nonfarm payroll data rose, which gave a boost to 75bps rate hike expectations, but soon soured when US inflation came in softer-than-expected. Since then, Federal Reserve policymakers have expressed intentions of continuing its inflation-busting interest rate hikes, as the US was still far from claiming victory over inflation.

Further lending support to the US Dollar is the expectation of another rise in retail sales, hinting at a resilient US economy. However, with inflationary pressures still high, concerns of a rise in sales could be a result of higher prices rather than high sales volumes.

GBP/USD Exchange Rate Forecast: US Retail Sales to Bolster the US Dollar?

Looming ahead, US retail sales are due to increase for the second consecutive month, lending support to the resilience of the US economy amid softening inflation. FOMC minutes are set to be released, markets will be focused on any hints at further rate hikes.

Elsewhere, as the market continues to digest the UK’s record-high inflation rate, Sterling could see further fluctuations.

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