Pound US Dollar Exchange Rate News: GBP/USD Strengthened amid Hotter-than-Expected UK Inflation

November 16, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Strengthened amid Hotter-than-Expected UK Inflation

Pound (GBP) Underpinned by Further Interest Rate Hikes

The Pound (GBP) strengthened against most of its rivals on Tuesday, in the wake of hotter-than-expected CPI inflation. Leaping from 10.1% in September to 11.1%, the highest level since 1981, headline CPI continues to heap pressure on the cost-of-living crisis.

Soaring energy prices are the main driver for the surge in inflation, but the Energy Price Guarantee ensured inflation didn’t reach 13.8%. Without government intervention on household energy bills, the cost-of-living crisis would have been far greater than it already is.

Meanwhile, core inflation, excluding energy, food, alcohol, and tobacco prices, remained steady at 6.5%. Despite not climbing, core inflation remains agonisingly high, and is weighing on households who are struggling with the living cost squeeze.

Propping Sterling up, however, are heightened rate hike expectations. With the Bank of England (BoE) target rate inflation of 2% further away than ever, the central bank may be left with little choice but to raise rates by 75bps again. But Chris Beauchamp, Chief Market Analyst at IG Group, has warned of a greater recession could be looming:

‘The news that inflation has hit a four-decade high is not perhaps the framing the chancellor wanted for his statement tomorrow, but it does underline again the twin challenges facing UK households, namely rising costs and now higher taxes.’

However, lending some modest support to Sterling is news from Bali and the G20 summit. Prime Minister Rishi Sunak and President Joe Biden sat down to discuss the Northern Ireland protocol. Sunak promised Biden that an agreement will be met by the time of the 25th anniversary of the Good Friday agreement next year. However, foreign secretary James Cleverly warned there are ‘big gaps’ between the UK and EU in negotiations. Cleverly added:

‘Those ingredients are there, (but) we shouldn’t rush to the conclusion that therefore everything’s about to come good, because there is still serious work to do and there are still big gaps.’

US Dollar (USD) Soured by Falling Rate Hike Expectations

Meanwhile, the US Dollar (USD) faltered on Tuesday as investors pared back interest rate hike expectations. With expectations of inflation finally peaking, the Federal Reserve could be scaling back their hawkish stance.

With weaker-than-expected PPI inflation compounding softening consumer inflation, the safe-haven ‘Greenback’ lost demand in the face of improving global market sentiment. Kansas City Fed President Esther George argued that reining in inflation without causing a recession might not be feasible. George also went on to say that it would make sense for the Fed to slow the pace of interest rates going forward.

However, with news out of Europe that two missiles struck a grain facility in Poland, geopolitical tensions begun simmering. Two people died in Przewodów, a village 6km from the border of Ukraine. President Biden attempted to calm nerves and claimed that he didn’t believe the rockets came from Russia. Biden said:

‘There is preliminary information that contests that. I don’t want to say that until we completely investigate. But it is unlikely in the minds [sic] of its trajectory that it was fired from Russia. But we will see, we will see.”

GBP/USD Exchange Rate Forecast: Autumn Statement to Inspire the Pound?

Looking ahead, the Pound US Dollar exchange rate could see further movement with the release of Chancellor Jeremy Hunt’s autumn statement. Fiscal responsibility is likely to cheer investors, and with soaring inflation weighing heavy, tax rises and spending cuts are to be expected.

Meanwhile, US retail sales could influence the ‘Greenback’ as an expected 1% rise in sales could boost the US Dollar.

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