Pound US Dollar Exchange Rate News: GBP/USD Surged on UK Energy Bill Freeze

Modified: Friday, 9 September 2022 13:05 BST - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Surged on UK Energy Bill Freeze

Pound (GBP) Boosted by Energy Bill Relief Plans

The Pound (GBP) enjoyed rare strength against some of its rivals on Friday as Prime Minister Liz Truss’ energy bill plan has cooled investors’ fears of further economic collapse.

Truss revealed her plans of an energy bill cap of two years to alleviate some of the financial burden on UK households. In a fiscal package said to be worth up to £100bn, the ‘energy price guarantee’ will come into place on October 1, in line with the expected rise in the energy bill cap.

Lending some further support to Sterling, is confirmation that the Bank of England (BoE) will continue to press on with raising interest rates despite the Prime Minister's huge financial bailout plan. To combat the spiralling cost-of-living crisis, the £100bn energy bill cap will see inflation peak much lower than previously anticipated.

After concerns of UK inflation hitting 18%, analysts are now predicting a much lower figure of 11%. But as the central bank’s inflation target is 2%, there is still a long way to go. George Buckley, economist at Nomura London, said:

‘I suspect that the size of the package is probably going to weigh on the minds of the (Monetary Policy Committee) members and this is why we’ve upped our forecast for what the Bank does over the course of the next few months or at least one of the reasons why we’ve got 50 basis points in the bank next week.’

However, with an ever-worsening economic outlook for the UK not set to improve anytime soon, these headwinds for Sterling could keep any significant gains under wraps. Also, mounting concerns of how the energy bill cap will be paid for. As Truss has ruled out using windfall taxes, the high cost of borrowing will have to come from taxes down the line. Until further details emerge of how the Treasury will find such an expense, which is said to be bigger than the Covid furlough scheme, investors could remain apprehensive.

US Dollar (USD) Slumped on Risk-On Impulse

The US Dollar (USD) struggled for demand as safe-haven flows dried up on a strong recovery in global risk sentiment. The US Dollar Index has fallen dramatically to a fresh monthly low as demand is sapped for safe-haven currencies, including the US Dollar.

However, the continued hawkish stance from the Federal Reserve could keep losses to a minimum. Expectations continue to grow of the Fed maintaining its monetary policy tightening going forward. The odds for a bold 75bps rate hike now sit at 85%, after Fed Chair Jerome Powell reiterated the central bank’s priority in reining in inflation. Powell said:

‘History cautions strongly against prematurely loosening policy. I can assure you that my colleagues and I are strongly committed to this project (bringing inflation down), and we will keep at it until the job is done.’

GBP/USD Exchange Rate Forecast: Flurry of UK Data to Dampen the Pound?

Looking ahead, the Pound US Dollar exchange rate could fluctuate once more amid a turbulent week of data releases and a wavering market mood. Despite relatively upbeat investor moods at present, fears of a Eurozone recession could see a waning global market mood. If safe-haven flows resume, the US Dollar could see a spike in demand.

Meanwhile, the BoE have confirmed that they will postpone the September interest rate decision in the wake of the death of Queen Elizabeth II. Delays and postponement could see Sterling trade on market mood alone in the early stages of next week’s session.

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TAGS: Pound Dollar Forecasts