Pound US Dollar Exchange Rate News: GBP/USD Strengthened on Hopes of Easing US Inflation

February 8, 2023 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Strengthened on Hopes of Easing US Inflation

US Dollar (USD) Soured by Dovish Fed Speech

The US Dollar (USD) struggled for demand on Wednesday as a speech from Federal Reserve Chair Jerome Powell poured cold water on hopes for a continued aggressive monetary policy.

In the wake of stronger-than-expected labour market data last week, the wider market braced for a hawkish speech from Powell. However, despite admitting that further interest rates are needed, he did admit that inflation was easing, lending credence to the US finally reaching peak rate hikes.

However, the US Dollar could climb again on elevated interest rate hikes. Russ Mould, Investment Director of AJ Bell, commented:

‘Whether Powell will remain so relaxed if the next set of payroll figures are similarly elevated is open to question and investors will be keeping a close eye on next week’s US inflation figures for January. If there is any sign of a renewed uptick in prices, then the market would likely respond very negatively.’

Pound (GBP) Supported by Improved Economic Outlook

Meanwhile, the Pound (GBP) enjoyed moderate success against its rivals on Wednesday as the FTSE 100 index hit a record high as global market sentiment improved drastically. Amidst dovish Fed speak, a reopening China, and hopes of central banks finally ending their rate hike cycles, the market has seen renewed optimism.

Further helping the Pound, is the National Institute of Economic and Social Research (NIESR) issuing a rare optimistic outlook for the UK economy. Predictions of not only the UK avoiding a recession, but the economy could in fact grow in 2023, contrary to warnings from the International Monetary Fund (IMF) and the Bank of England (BoE).

However, the same report also warned that UK households could suffer from a £4000 financial hit in 2023, as the cost-of-living crisis is expected to continue. Despite avoiding a recession, millions of households in the UK could still suffer, making it feel like a recession. The report also warns of the growing inequality developing in the UK. The series of economic shocks to the UK, including Brexit, Covid, and the energy crisis, have made households considerably poorer. Jagjit Chadha, Director of NIESR, commented:

‘What we’ve seen is the shocks that have come along have progressively made us poorer per person. We can talk about the average growth rate of the economy, but that masks household and regional inequalities.

‘We can point to areas where income per head has grown, but on average it’s low. And that low average also means many households have had deteriorating standards of living over time. That’s the key frustration the UK economy is facing.’

GBP/USD Exchange Rate Forecast: Flurry of Fed Speeches to Boost the Greenback?

Looking ahead, the Pound US Dollar exchange rate could see further movement with a series of speeches from Fed policymakers. If hawkish tones are struck from any of them, USD investors could be buoyed. However, with Powell emphasising the ‘disinflation process’, the prospect of the Fed finally slowing or pausing their interest rate hikes could sour things further.

Meanwhile, the Pound will continue to trade on market sentiment. It remains to be seen, however, how long the latest optimism surrounding the economic outlook for the UK will last. If pessimism returns, Sterling could sour.

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TAGS: Pound Dollar Forecasts