Pound US Dollar (GBP/USD) Exchange Rate Drops as US PPI Beats Forecasts

February 16, 2023 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Drops as US PPI Beats Forecasts

Pound US Dollar (GBP/USD) Exchange Rate Drops as US PPI Beats Forecasts

The Pound US Dollar (GBP/USD) exchange rate fell on Thursday, following the publication of the latest US producer price index data, which came in above forecasts.

At the time of writing, GBP/USD traded around US$1.978, a decline of 0.5% from Thursday’s opening rates.

US Dollar (USD) Shores Up amid Hotter-Than-Expected PPI

The US Dollar (USD) made gains against most major peers on Thursday, following the release of the latest producer price index for January.

The monthly reading showed a 0.7% increase in PPI, far above forecasts of an increase of 0.4%. Because of this, investors renewed their bets on increased interest rate hikes from the Federal Reserve.

By pointing to inflation being stickier than expected, impetus for the Fed to control inflation was renewed. Furthermore, the number of Americans filing jobless claims fell by 1000, pointing to a tight labour market.

As such, there appeared to be room for further aggression from the Fed, leading to USD investors supporting the ‘Greenback’.


The ‘Greenback’ may have been capped by an unexpected drop in the Philadelphia Fed Manufacturing index.

The accompanying report stated: ‘The indicators for current activity and new orders remained in negative territory, while the shipments index remained positive but low. The firms continued to indicate overall increases in prices paid and received. The survey’s future indexes continued to suggest tempered expectations for growth over the next six months.’

Pound (GBP) Mixed as Investors Adjust Rate Hike Bets

The Pound (GBP) saw mixed trade on Thursday, as GBP investors continued to pore over the latest inflation data. A lack of other macroeconomic data releases kept Sterling fairly quiet.

With headline and core inflation both cooling further than expected, investors began to expect that the Bank of England (BoE) may not continue with their current aggressive interest rate hiking cycle. As such, Sterling lost support against currencies with impactful data releases, such as the US Dollar.

James Smith, Developed Markets Economist at ING, explored this further. He stated: ‘The Bank dropped a firm hint in February that its latest 50bp rate hike might have been the last, though recent comments have suggested that committee members are still minded to hike a little further. We are therefore still pencilling in a 25bp hike next month for the time being.’

Furthermore, market mood likely played a role in shaping Sterling’s direction during Thursday’s session. With the mood alternating between risk on and risk off, the increasingly risk sensitive Pound was unable to make consistent gains.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: UK Retail Sales Fall to Dent GBP?

Looking ahead for the Pound (GBP), the core catalyst of movement is likely to be Friday’s retail sales data for January. Sales are forecast to have declined on a monthly basis by 0.3%, and 5.5% on a yearly basis. As such, the Pound could struggle for support if the data prints accurately, as it reflects continuing weakness in the UK’s retail sector as inflation and the UK’s cost of living crisis continues to bear down on consumers and households.

Furthermore, Bank of England (BoE) Chief Economist Huw Pill is scheduled to deliver a speech on Thursday evening. If he strikes a hawkish attitude towards inflation, GBP may weaken. However, due to the recent inflation data, he may consider a pause and send Sterling downwards.

For the US Dollar (USD), a litany of Federal Reserve officials are scheduled to speak over Thursday evening and Friday. If these policymakers continue to reiterate the Fed’s hawkish stance on inflation, USD could rally further in light of recent inflation data.

Elsewhere, market sentiment may also shape the pairing. With the US Dollar being a safe haven currency, a shift towards optimistic trade may favour Sterling.

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TAGS: Pound Dollar Forecasts