Pound US Dollar Exchange Rate News: GBP/USD Fluctuated amid Hotter-than-Expected US Inflation

February 14, 2023 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Fluctuated amid Hotter-than-Expected US Inflation

US Dollar (USD) Undermined by Falling Inflation

The US Dollar (USD) came under heavy selling pressure in the wake of headline CPI falling for the seventh consecutive month. Against expectations of slowing to 6.2%, consumer inflation printed at 6.4%, marginally softer than December’s 6.5%.

A considerable slowdown was noted with food prices and used cars leading the biggest drivers but saw fuel and shelter prices continued to increase. Lending some modest support, however, is that despite inflation having peaked in June of last year, it remains far above the Federal Reserve’s target rate of 2%. An increase of 0.5% compared to December also points to the most in three months due to mounting price pressures.

However, Jeffrey Roach, Chief Economist at LPL Financial, is confident that the Fed could continue their hiking path:

‘Inflation is easing but the path to lower inflation will not likely be smooth. The Fed will not make decisions based on just one report but clearly the risks are rising that inflation will not cool fast enough for the Fed's liking.’

Pound (GBP) Propped up by Increased BoE Rate Hike Bets

Meanwhile, the Pound (GBP) held onto modest gains as mixed employment data lent considerable support for the Bank of England (BoE) to continue their interest rate hiking path.

Unemployment figures cheered investors as it remained at 3.7% for the third straight month. As for employment data, the number of those entering the workforce soared above expectations of a 40,000 increase and saw a rise of 74,000. With a hotter-than-expected labour market, the BoE could be encouraged to continue their tightening cycle to bring inflation back down to a more manageable level.

However, muting the mood somewhat is the concerning pay data underlying the labour market. Despite the resilient labour market, real-term wages continue to plummet, underlining the economic strain that currently weighs on the UK economy. When adjusted for inflation, wages fell by 3.6% in the three months leading to December, one of the largest drops on record. Stephen Evans, Chief Executive of the Learning and Work Institute, commented on the dire real wage growth:

‘Real earnings are falling at their fastest rates since the financial crisis due to high inflation, leaving them no higher now than before the pandemic. A miserable 15 years for real wage growth means people would be earning £11,000 a year more on average if pre-financial crisis trends had continued.’

Capping any significant gains for Sterling, however, is the strain that industrial action continues to have on the UK economy. With more days lost to striking in December than any on record for over 10 years, the ongoing economic impact could be weighing on GBP investors. According to the Office for National Statistics (ONS), 843,000 days were lost in December to strikes, and Nye Cominetti, Senior Economist at The Resolution Foundation, warned that the tough times are far from over:

‘The fall in economic inactivity since the summer is welcome, though the accompanying rise in zero-hours contracts less so. And the bigger picture is a stark real wage squeeze that is prompting ever more industrial action.’

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

Looking ahead, the Pound US Dollar exchange rate could see further fluctuations with the latest headline CPI reading. Another softening is on the cards, but inflation is set to remain in the double digits, which could still cheer GBP investors. Combined with the tight labour market, the BoE could continue raising interest rates.

Meanwhile, US Dollar investors could look to retail sales on Wednesday for further clues as to how the Fed reacts to the latest inflation data. An expected improvement over last month’s 1.1% drop could cheer investors. Market expectations of a 1.8% growth in sales could boost the ‘Greenback’.

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