Pound US Dollar Exchange Rate News: GBP/USD Surges as UK Inflation Rises

March 22, 2023 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Surges as UK Inflation Rises

Pound US Dollar Exchange Rate Slumps on Disappointing UK PMIs

The Pound US Dollar (GBP/USD) exchange rate accelerated on Wednesday, following the publication of the UK’s latest inflation figures.

This saw the GBP/USD exchange rate trade at around $1.2284 at the time of writing. Up roughly 0.5% from the day’s opening levels.

Pound (GBP) Soars as Stronger-than-Expected Inflation Boosts BoE Rate Hike Bets

The Pound (GBP) rallied against the US Dollar and the majority of its other peers on Wednesday, following the publication of the UK’s consumer price index.

According to data published by the Office for National Statistics (ONS) inflation in the UK unexpectedly climbed from 10.1% to 10.4% in February. This both beat forecasts for a deceleration to 9.9% and also reverses four months of consecutive declines.
The ONS attributed a key part of the rise to the recent shortages of salad vegetables driving up food prices.

However the accompanying core CPI figures - which strips out volatile items like food and fuel - also reported underlying inflation outpaced expectations as it rose from 5.8% to 6.2% versus forecasts for a decline to 5.7%, suggesting the uptick in inflation may not just be down to temporary factors.

The data turbocharged bets for a rate hike from the Bank of England (BoE) when it concludes its March policy meeting on Thursday. GBP investors are now pricing in a 95% chance of a 25bps hike from the bank.

Prior to today’s CPI release investors were evenly split on whether the BoE would pursue the hike in light of the recent drama in the banking sector.

Benjamin Trevis, economist at the Centre for Economics and Business Research, commented:

‘Moreover, fast-moving developments surrounding recent banking trouble provide another challenge to the BoE’s decision tomorrow, following the collapse of Silicon Valley Bank and the takeover of Credit Suisse, which could lead to the abandoning of an expected rate rise due to concerns over stability in the financial system.

‘Considering the surprise uptick in the February inflation data and especially the worrying trend in core price pressures, Cebr expects a split Monetary Policy Committee decision resulting in a 25 basis point rise tomorrow at noon.’

US Dollar (USD) Slips ahead of Fed Interest Rate Decision

At the same time, the US Dollar (USD) struggled to attract support on Wednesday as markets braced for the Federal Reserve’s latest interest rate decision.

CME Group’s Fedwatch tool suggests the odds of a 25bps rate hike from the Fed this month is over 90%.

With this largely priced in by markets the focus for USD investors is likely to be on the Fed’s forward guidance. If the bank signals the recent convulsions in the banking sector will lead to a more cautious approach to monetary policy going forward the US Dollar is likely to fall.

On the other hand, if it remains focused on taming inflation this could suggest more interest rate hikes are to come and this could boost USD.

Esther Reichelt, FX Analyst at Commerzbank, suggests:

‘The more the Fed focuses on the disinflationary aspects of the recent market turmoil, the more difficult it will be for the Dollar to hold its ground.

‘If the focus remains on inflation risks when setting interest rates, while at the same time, the Fed manages to calm the markets by pointing to its options beyond interest rates, the Dollar should be able to regain ground.’

GBP/USD Exchange Rate Forecast: Will a Dovish BoE Weaken Sterling?

Looking past the Fed rate decision to the second half of the week, the main catalyst of movement in the Pound US Dollar (GBP/USD) exchange rate is likely to be the BoE’s own rate decision.

Even if the BoE delivers a 25bps hike as expected, Sterling could weaken if the bank’s forward guidance indicates it has reached the end of its currency tightening cycle.

Also of note to GBP exchange rates later in the week will be the UK’s latest PMI figures. March’s preliminary figures could provide some support to the pound if they report another uptick in growth in the UK’s private sector.
Meanwhile, a rebound in US durable goods orders may underpin the US Dollar at the end of the week.

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TAGS: Pound Dollar Forecasts