Pound US Dollar (GBP/USD) Exchange Rate Firms as UK Inflation Expectations Rise

December 9, 2022 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Firms as UK Inflation Expectations Rise

Pound US Dollar (GBP/USD) Exchange Rate Rises as UK Public Expects Higher Inflation

The Pound US Dollar (GBP/USD) exchange rate firmed on Friday, as the latest UK public inflation expectation data edged higher.

At the time of writing, GBP/USD traded at around US$1.2261, an increase of roughly 0.2% from Friday’s opening rates.

Pound (GBP) Firms as UK Public Inflation Expectations Rise

The Pound (GBP) edged higher on Friday, following the release of the latest UK public inflation expectations on Friday morning.

Expectations for inflation in the medium term rose to 3.4% in November, up from 3.2% in August, hitting the highest reading since May.

With this in mind, investors have grown optimistic over further tightening from the Bank of England (BoE). Currently, markets have priced in the next rate hike at 50bps, while the BoE has continually asserted its desire to curtail soaring inflation and prevent it from bedding in further to UK businesses.

Philip Shaw, an Economist at Investec expanded on this. He stated: ‘To our minds, another 50 basis point increase looks likely. The BoE has made it pretty clear that inflation is too high. It’s concerned about the tightness of the labour market.’

As such, Sterling is edging higher as investors hedge future bets for higher interest rate hikes as inflation remains a key pressure on the UK economy.

Elsewhere, Chancellor Jeremy Hunt has revealed plans to reform the UK financial sector. While some analysts are optimistic about what the reforms can bring to the table in terms of encouraging economic growth, many are questioning the relaxation of measures introduced following the 2008 financial crash.

Because of this, GBP’s gains may be capped as investors remain cautious of the UK’s economic outlook.

US Dollar (USD) Quiet Ahead of Key Data Release

The US Dollar (USD) traded quietly on Friday, as investors were awaiting the latest PPI data for the US.

As inflation is currently showing signs of cooling, with the Federal Reserve taking a dovish stance and calling for a slowdown in rate hikes, investors are remaining cautious ahead of the data release.

Fed policymakers and USD investors are likely to keep a close eye on Friday afternoon’s PPI data, with the Fed still on a blackout ahead of next week’s interest rate decision. A 50bps hike is currently expected, but a shock uptick in PPI could reignite bets for higher rate hikes.

Further weighing on the ‘Greenback’ is a fall in US Treasury bond yields. These are usually a barometer for interest rate hike bets, showing that investors may have calmed expectations for higher rate hikes.

Elsewhere, USD is remaining muted as the usual seasonal headwinds continue to impact its appeal. According to analysts at ING, the US Dollar is usually weaker during December, meaning investors are largely focused on damage limitation.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: UK GDP to Lift Sterling?

Looking ahead for the Pound, the core driver of movement may come from next Monday’s GDP data. October’s data is forecast to show an increase from -0.6% to 0.4%, which may bring cheer to GBP investors by showing that the UK’s recession may be shallower than expected.

However, the three-month average GDP figure is expected to slip from -0.2% to a further contraction of -0.3%, which could dampen enthusiasm by reasserting the recession’s impact on economic growth.

Furthermore, October’s balance of trade figures are expected to show a narrowing trade deficit, which may boost Sterling.

For the US Dollar, later on Friday the latest PPI data is due to release. With MoM and YoY figures painting a different picture, the nature of the Federal Reserve’s next rate hike decision may remain clouded, prompting muted trade for the ‘Greenback’.

However, an uptick in the Michigan consumer sentiment index may bring some tailwinds to the US Dollar, due to the economy’s consumption based nature.

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TAGS: Pound Dollar Forecasts