Pound US Dollar Exchange Rate News: GBP/USD Rangebound Ahead of US Inflation Data

May 10, 2023 - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Rangebound Ahead of US Inflation Data

US Dollar (USD) Choppy Ahead of Crucial Inflation Data

The US Dollar (USD) endured mixed trading conditions on Wednesday as investors move to the sidelines in anticipation of key headline CPI data.

With inflation set to remain unchanged at 5% after nine consecutive months of cooling CPI readings, a softer-than-expected reading could send the ‘Greenback’ plummeting on increased expectations for a pause from the Federal Reserve. Francesco Pesole, economist at ING, said of the inflation dilemma for the Fed:

‘If these are the numbers we see in today’s print, we think the Fed will be allowed to leave the door open to a potential revamp of tightening (even though we think the peak has been reached) and most importantly have some support – also offered by strong jobs data – to keep pushing back against rate cut expectations.’

With hints having already been dropped by Fed officials in the past week of an end to the tightening cycle, USD investors are still on the fence over how the inflation rate will impact proceedings. After stronger-than-expected labour market data providing the Fed with further headaches, all eyes will be on the inflation data on Wednesday.

Meanwhile, preventing any further losses for the ‘Greenback’ is waning market sentiment. Amid fears of slowing global growth after China’s faltering imports, and the lingering US banking crisis, safe-haven flows could be keeping the US Dollar moderately supported.

Pound (GBP) Boosted by Expectations of Further Tightening

Meanwhile, the Pound (GBP) also struggled for increased demand as investors were reluctant in placing too many bets ahead of the interest rate decision on Thursday. A lack of economic data left Sterling trading on market sentiment and hedged bets.

With expectations of the Bank of England (BoE) raising the interest rate to 4.5%, the highest level since 2007, focus will be on the accompanying statement. With recent hawkish comments from BoE policymakers, and combined with the fact that inflation remains far above the BoE’s target rate of 2%, further tightening is increasingly likely.

Inflation in the UK currently sits at 10.1%, more than twice the level of the US, and with a quarter-point hike almost guaranteed, the Pound held its ground despite a downbeat market mood.

GBP/USD Exchange Rate Forecast: Surprise Inflation Reading to Dent the US Dollar?

Looking ahead, the Pound US Dollar exchange rate could see further movement with the release of the latest US inflation data. With the markets pricing in an unchanged headline inflation rate of 5%, and core inflation set to ease from 5.6% to 5.5%, the ‘Greenback’ could soften.

However, if inflation surprises, movement could be greatly influenced. A stronger-than-expected headline CPI or core inflation could open the doors to more rate hikes from the Fed, potentially firing the ‘Greenback’ higher.

Meanwhile, the Pound will likely trade in a narrow range ahead of the highly-anticipated interest rate decision on Thursday.

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TAGS: Pound Dollar Forecasts