Pound US Dollar (GBP/USD) Exchange Rate Climbs Despite Slip in UK Inflation

December 14, 2022 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Climbs Despite Slip in UK Inflation

Pound US Dollar (GBP/USD) Exchange Rate Rises amid Risk-On Mood

The Pound US Dollar (GBP/USD) exchange rate climbed on Wednesday. The currency pair was bolstered by expectations of a 50bps interest rate hike from the Bank of England (BoE) later this week. GBP/USD saw its gains capped amid a pullback in risk appetite, however.

At time of writing the GBP/USD exchange rate was at around $1.2375, which was up roughly 0.2% from that morning’s opening figures.

Pound (GBP) Firms Despite Inflation Cooldown

The Pound (GBP) ticked higher on Wednesday. Cooler inflation figures kept the currency’s gains limited, although Sterling found support from persistent Bank of England (BoE) rate hike bets.

November’s inflation data saw the rate fall above forecasts to 10.7%, down from October’s 41-year high. A slow down in rising fuel costs was highlighted as the primary driver of the data, as well as a downturn in second-hand car prices.

Despite the cooler data, the BoE is still largely expected to raise interest rates by 50bps on Thursday as prices remain high.

Paul Dales, chief UK economist at Capital Economics, said:

‘The Bank of England can breathe a sigh of relief knowing that CPI inflation has peaked. But with activity holding up and wage growth still strengthening, the 2.0% inflation target is still a long way from being hit. As such, the Bank will still probably raise interest rates by 50 basis points.’

Recent reports how detailed a split in the BoE’s monetary policy committee (MPC) as to how high interest rates will ultimately go.

Sterling also saw its gains limited by further industrial action in the UK. Wednesday saw fresh rail, mail, energy, and civil service sector strikes.

US Dollar (USD) Edges Lower as Markets Anticipate Cautious Fed Rate Hike

The US Dollar (USD) slipped on Wednesday. A downturn in US Treasury bond yields also weighed on USD, although the safe-haven 'Greenback' found support from a risk-off market mood.

Expectations of a slower pace of policy tightening from the Federal Reserve also contributed to the currency’s losses on Wednesday. Following cooler-than-expected inflation figures on Tuesday, markets have continued to pare back bets on more aggressive action from the central bank.

Investors still largely anticipate hawkish forward guidance from Fed Chair Jerome Powell following the interest rate decision, however. This likely helped limit USD’s losses.

Subadra Rajappa, Societe Generale's head of U.S. rates strategy, said:

‘I don’t see him [Powell] pivoting in a meaningful way on policy – I think it's just too soon.’

US President Joe Biden echoed this sentiment on Tuesday. Biden stated that his aim was to bring prices down, but that the transition to normal inflation could still take some time.

GBP/USD Exchange Rate Forecast: Will Fed Signal Policy Tightening Slowdown?

Looking ahead to the rest of the week for the US Dollar, the Fed’s interest rate decision on Wednesday will be closely watched by investors. Following Tuesday’s cooler inflation data, markets have largely priced in a 50 bps rate hike from the central bank. Signs of a softer pace of policy tightening in the Fed’s forward guidance could push USD lower.

A forecast slump in US retail sales could also weigh on the US Dollar if Thursday’s figures print as forecast. Also on Thursday, if initial jobless claims remain high as predicted then it could also keep pressure on USD.

For the Pound, the BoE’s interest rate decision on Thursday is likely to cause movement in the currency. Similar to the Fed’s position, signs of cooling inflation earlier this week is like to see the central bank hike rates as forecast. If the BoE signals a more cautious stance, then it could prompt losses in GBP.

On Friday, a slowdown in November’s retail sales could add to the UK’s downbeat outlook and see Sterling drop.

The UK’s ‘winter of discontent’ could also dent confidence in GBP this week. The UK faces further rail, postal, and health sector strikes.

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