Pound US Dollar Exchange Rate News: GBP/USD Climbs as USD Investors Become Cautious

December 13, 2022 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Climbs as USD Investors Become Cautious

GBP/USD Exchange Rate Wavers Higher as US awaits CPI Report

The Pound to US Dollar (GBP/USD) exchange rate fluctuated higher on Tuesday, as investors awaited key US inflation data.

At time of writing the GBP/USD exchange rate traded at around $1.22964, which was roughly up 0.2% from Tuesday’s opening levels.

US Dollar (USD) Wobbles Pending CPI Release

The US Dollar (USD) found its potential capped on Tuesday, as USD investors set their sights on crucial inflation data.

The consensus is that US headline inflation rate will drop from 7.7% to 7.3% in November. Whilst this may ease rising recession concerns in the US, it will likely cause headwinds for the ‘Greenback’.

The Federal Reserve has indicated it’s prepared to slow the rate of interest rate hikes as US inflation shows signs of easing. If inflation eases as expected this could support the Fed’s desire to pursue smaller hikes. However, mixed data over the last week could point to inflation being sticker than first anticipated.

It’s this uncertainty that drove USD movement ahead of Monday afternoon’s data release. US investors were awaiting the inflation rate to indicate whether the Fed will stick with a 50bps hike. If Inflation comes in hotter than expected, this could raise expectations of another 75bps hike on Wednesday.

Pound (GBP) Mixed as the UK’s Unemployment Rate Climbs

The Pound (GBP) was up against the US Dollar but traded mixed elsewhere on Tuesday. The latest UK unemployment figures hinted at further economic headwinds, denting GBP’s desirability.

According to the report from the Office of National Statistics (ONS), unemployment rose in October. The jobless rate climbed for 3.6% to 3.7%. The ONS also reported that real wages had fallen by 2.7% in the three months to October, one of the largest falls in incomes since records began in 2001.

Whilst the increase in unemployment was expected this, coupled with the fall in real wages, further compounded recession and cost-of-living concerns. The ONS report comes as widespread industrial action continues to disrupt UK services.

Increasingly, UK households are finding their spending power weakened in the face of rising inflation. Workers are striking for an increase in wages that matches the pace of inflation. However, there is reluctance from the UK government to meet demands. The main concern being increasing wages too high could trigger a wage-price spiral.

Commenting on Tuesday’s data and strike action Chancellor Jeremery Hunt said:

‘We have a plan which will help to more than halve inflation next year - but that requires some difficult decisions now. Any action that risks embedding high prices into our economy will only prolong the pain for everyone, and stunt any prospect of long-term economic growth.’

As the UK’s economic outlook continued to worsen on Tuesday, the Pound found its upside capped. However, a mostly upbeat market mood lifted the riskier Pound against the safer US Dollar.

GBP/USD Exchange Rate Forecast: UK Inflation to Support the Pound?

Turning to Wednesday, the Pound US Dollar will likely be guided by the UK inflation rate.

The consensus is that headline inflation will drop from 11.1% to 10.9% in November. If this happens the Pound could see an uptick as inflationary pressures ease for the UK consumer.

However, it could also cause headwinds as the Bank of England (BoE) prepares to make their next rate decision on Thursday. Easing inflation could reinforce the bank’s desire to keep hikes small.

The Federal Reserve’s interest rate decision is due on Wednesday. With investors still uncertain about the hike size, the US Dollar could fluctuate on Wednesday ahead of the decision.

If the Fed pursue a smaller hike, USD could be dented. However, a more aggressive move could support the US Dollar.

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TAGS: Pound Dollar Forecasts