Pound US Dollar Exchange Rate News: GBP/USD Soars amid More Mini-Budget U-Turn Expectations

October 13, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Soars amid More Mini-Budget U-Turn Expectations

GBP/USD Exchange Rate Firms as GBP Investors Latch on to Government Discussions

The Pound to US Dollar (GBP/USD) exchange rate was strengthening on Thursday as it came to light that ‘active’ discussions were being had about scrapping parts of the UK mini-budget.

At time of writing the GBP/USD exchange rate traded at around $1.1216, which was roughly up 1% from Thursday’s opening levels.

Pound (GBP) Soars as Investors Embrace Potential Mini-Budget Reversals

The Pound (GBP) was climbing against the majority of its peers on Thursday as GBP investors caught wind of rumours the UK government was considering further mini-budget back-peddling.

The budget, which was unveiled by Chancellor Kwasi Kwarteng in late September, has caused chaos in recent weeks. The Pound has been extremely volatile as investors doubt the sustainability of the unfunded tax cuts set out in the plan.

Most recently the budget caused mortgage rates to climb, adding further financial strain for UK consumers who are already facing energy shortages this winter.

Speaking on the mini-budget debacle on Thursday afternoon, former Conservative chancellor, Lord Norman Lamont said the government has only three choices: reverse the mini-budget, slash public spending (which Liz Truss has ruled out) or try to ’fudge the arrangement with the OBR’.

The prospect that Truss could scrap parts of her potentially damaging fiscal policy saw the Pound surge.

US Dollar (USD) Climbs amid Increased Headline Inflation

The US Dollar (USD) dropped against Sterling on Thursday but was up against almost all its other peers as US inflation printed higher than expected.

Data released on Thursday afternoon revealed that headline inflation in September printed at 8.2%, passing the expectation of 8.1%. Core inflation, which strips out food and energy costs, hit a 40-year high, rising more than expected to 6.6%.

The higher inflation served to bolster the safe-haven ‘Greenback’ on the expectation of further aggressive monetary tightening from the Federal Reserve.

In the minutes from the Fed meeting on Wednesday it was said officials:

‘emphasized the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action’.

As such, markets are currently pricing in a 75bps hike in the Fed’s next meeting and even looking ahead to December with aggressive hike expectations. However, it’s possible that USD’s upside was limited as there was talk amongst policymakers of slowing the rate of hikes amid recession concerns.

Chris Zaccarelli, Chief Investment Officer at Independent Advisor Alliance said:

‘[Policymakers have] been talking about how they're willing to risk a recession in order to bring inflation back under control, but it’s possible that as the recession risks increase they may lose their nerve a little bit’.

GBP/USD Exchange Rate Forecast: GBP to be Driven by Budget U-Turn?

Looking ahead to tomorrow, the Pound US Dollar could continue to see significant movement based on mini-budget developments.

A lack of UK data on Friday means GBP investors will likely turn to domestic headlines to guide trade. If the government confirms any reversals within the mini-budget, then Sterling could enjoy more tailwinds. However, these could be limited by political uncertainty amid speculation that Liz Truss may be ousted as prime minister.

As for USD, American retail figures for September are expected to drop, which could dent the currency’s gains on Friday.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Dollar Forecasts