Pound US Dollar Exchange Rate News: GBP/USD Wavered as UK Inflation Fell to 8.7%

Modified: Wednesday, 24 May 2023 16:05 BST - Written by John Cameron

STORY LINK Pound US Dollar Exchange Rate News: GBP/USD Wavered as UK Inflation Fell to 8.7%

Pound (GBP) Undermined by Tumbling Inflation

The Pound (GBP) struggled for sustained demand on Wednesday in the wake of hotter-than-expected inflation. Against expectations of headline CPI easing to 8.2%, inflation came in at 8.7%.

The Office for National Statistics (ONS) revealed inflation in the UK declined for the first time since August. It also signalled the steepest decline since the living cost crisis began. The biggest contribution to slowing inflation was a significant reduction in household energy prices, which saw a 1.4% drop.

However, preventing a further drop was persistently high food price inflation. In the year leading up to April, prices for food and non-alcoholic drinks sky-rocketed by 19%, as they continued to rise at the fastest pace since 1977. Grant Fitzner, ONS Chief Economist commented:

‘Prices in general remain substantially higher than they were this time last year, with annual food price inflation near historic highs.’

Limiting any further losses for Sterling was the firm belief that the Bank of England (BoE) will continue its aggressive tightening cycle. The markets have now priced in a 100% probability that the central bank will raise the interest rates at the next policy meeting in June. With the inflation rate still far above the target rate of 2%, Paul Dales, Chief Economist at Capital Economics, believes the door remains open for further hikes beyond June:

‘With inflation proving stickier than the Bank expected, it now seems all but certain that the Bank will raise interest rates from 4.50% to 4.75% in June and perhaps a bit further in the months after.’

US Dollar (USD) Subdued ahead of FOMC Minutes

Meanwhile, the US Dollar (USD) was quiet through most of Wednesday’s session, as USD investors remained on the sidelines ahead of the Federal Open Market Committee (FOMC) minutes.

The publication of the latest minutes from the previous policy meeting would help investors in understanding the Federal Reserve’s future movements. If the minutes were to indicate the Fed has not ended its tightening cycle, the ‘Greenback’ could rally.
At present, however, the markets have priced a 64% chance of a pause at the next policy meeting. If the minutes were to prove to be in line with these suspicions, the US Dollar could slump further, especially if talk of rate cuts were on the table.

Elsewhere, a lack of progress in the debt limit negotiations between the White House and Republicans is keeping a firm lid on the US Dollar. With concerns over the US defaulting on their government debts, the financial fallout could be catastrophic. Until a solution can be reached, the ‘Greenback’ could remain under pressure.

GBP/USD Exchange Rate Forecast: FOMC Minutes to Boost the Greenback?

Looking ahead, the Pound US Dollar exchange rate could see wild movements with the release of the FOMC minutes from the May Fed meeting. Hawkish signs could boost the US Dollar, whereas talk of pausing or rate cuts could sap demand further.

Meanwhile, the Pound could see further fluctuations as the markets continue to digest the latest inflation reading. The next data release of note will be retail sales on Friday. An expected bounce back from last month’s slip could boost Sterling.

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TAGS: Pound Dollar Forecasts