Pound US Dollar Exchange Rate News: GBP/USD Plunged as UK Inflation Eased to 10.1%

Modified: Wednesday, 15 February 2023 12:35 BST - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Plunged as UK Inflation Eased to 10.1%

Pound (GBP) Plummeted on Reduced Rate Hike Expectations

The Pound (GBP) suffered immense selling pressure on Wednesday in the wake of softer-than-expected inflation. Against expectations of a modest softening to 10.3%, headline CPI slipped to 10.1%.

Despite remaining sky-high, and far above the Bank of England’s (BoE) target rate of 3%, price pressures appear to be easing much more than anticipated. A third consecutive month of softening inflation saw CPI fall to its lowest level since September of last year. On a monthly basis, however, it was the first decline in a year, and the single biggest monthly drop since January 2019. Chancellor Jeremy Hunt commented on the data:

‘While any fall in inflation is welcome, the fight is far from over. High inflation strangles growth and causes pain for families and businesses – that’s why we must stick to the plan to halve inflation this year, reduce debt and grow the economy.’

Core inflation, excluding volatile prices such as energy and food, fell even further than expected to 5.8% against a predicted 6.2%. With inflation printing lower than expected, investors could be concerned that the central bank could see this as an opportunity to pause rate hikes. BoE Chief Economist Huw Pill has already hinted that policymakers are concerned with increasing rates too much. Earlier in the month, Pill said:

‘It is important we do enough to attain our objective to return inflation to within the 2% target. But of course it is also important that we guard against the possibility of doing too much. We need to keep that zen-like balance in our objective.’

US Dollar (USD) Supported by Risk-Averse Mood

Meanwhile, the US Dollar (USD) strengthened considerably against its rivals amidst a risk-off market mood. As USD investors await a flurry of mid-tier data releases, the ‘Greenback’ remained supported by the biggest monthly increase in CPI since June.

With the inflation rate coming in hotter-than-expected on Tuesday at 6.4% against a predicted 6.2%, the US Dollar managed to climb. Also supporting the ‘Greenback’ was an uptick in US Treasury bond yields, as they firmed above 3.7%, and the likelihood of another rate hike all but baked in. With optimism surrounding the Federal Reserve finally easing their tightening cycle fading, the market mood soured, buoying the safe-haven ‘Greenback’.

GBP/USD Exchange Rate Forecast: US Retail Sales to Bolster the Greenback?

Looking ahead, the Pound US Dollar exchange rate could see further daylight between the pairing if US retail sales print as expected. A predicted rebound from last month’s dire sales, US retail figures are expected to increase by 1.8%. A stronger retail showing could show the economy is in good standing, boosting bets for further rate hikes.

Meanwhile, Sterling could be left floundering as the market continues to digest the latest inflation figures. However, a speech from BoE Chief Economist Huw Pill could lift the Pound if the central bank could see a means to continue raising interest rates.

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