Pound US Dollar Exchange Rate News: GBP/USD Climbed as US Inflation Fell

January 12, 2023 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Climbed as US Inflation Fell

US Dollar (USD) Slipped along with US Inflation

The US Dollar (USD) fell as headline inflation softened in line with expectations. Annualised CPI fell for the sixth straight month to 6.5%, the lowest level since October 2021. Despite a welcome softening of inflation to the rest of the market, USD investors could be feeling disheartened with the prospect of slowing interest rate hikes.

A welcome decline in energy prices gave some relief to households and businesses as consumer prices fell 0.1% MoM. Gasoline prices was the biggest drive of lowering inflation as costs fell by 1.5%, which offset the continued rise in shelter costs. However, investors must be wary of the continuing rise of core inflation, excluding volatile prices such as food and energy, as it climbed again by 0.3%.

As the Federal Reserve continues its fight against inflation, with pressures seemingly peaked, the market are hoping for a pivot from the aggressive cycle of monetary tightening. Richard Flynn, Managing Director of Charles Schwab UK, said of the falling inflation:

‘Looking ahead, the Fed has promised to “hike and hold” interest rates throughout 2023, which is unsurprising given the inflation rate remains well above the central bank’s target.

‘However, the story for the US economy in coming months will likely shift focus from inflationary concerns to potential stresses in the broader economy and labour market.’

Pound (GBP) Climbed Despite Mounting Domestic Issues

The Pound (GBP) ticked somewhat higher on Thursday despite a flurry of downbeat headlines. Industrial action and businesses turning cautious with a looming recession was slightly offset by strong Christmas food retail news.

The Office for National Statistics (ONS) revealed that the number of job openings have fallen below its pre-Covid levels. With a recession drawing closer, businesses have begun to tighten their purse strings and halted recruitment. The ONS report said:

‘The “HR and recruitment” job category saw the largest decrease and fell by 19%, followed by the “energy, oil and gas” job category, which fell by 7%.

‘Of the 12 UK countries and English regions, the largest falls were seen in the East Midlands, London and the Northeast, which all fell by 5%.’

Elsewhere, industrial action fails to let up as civil servants are expected to walk out over pay disputes and working conditions on 1 February. The Public and Commercial Services (PCS) union have announced that 100,000 members have voted to strike, a move which will be the largest industrial action in the sector for over 20 years.

A glimmer of optimism amidst the torrid storm of downbeat economic headlines was the positivity surrounding food retailers over the festive period. Both Tesco and Marks & Spencer reported a strong performance over the Christmas period. Tesco becomes the only food retailer to increase its market share compared to that of pre-pandemic levels.

GBP/USD Exchange Rate Forecast: Shrinking UK Economy to Sink Sterling?

Looking ahead, the Pound US Dollar exchange rate could see further movement with the release of UK GDP growth data. An expected return to a shrinking economy could weigh heavily on the Pound. With an expected 0.2% drop, concerns of a shaky economy could keep a firm lid on Sterling.

Meanwhile, with the release of inflation data, investors will now be keenly watching the Fed in how they respond to the drop in headline inflation.

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