Pound US Dollar (GBP/USD) Exchange Rate Rises as US Inflation Exceeds Forecast

July 13, 2022 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Rises as US Inflation Exceeds Forecast

GBP/USD Exchange Rate Wavers on Varied Tailwinds

The Pound US Dollar (GBP/USD) exchange rate has fluctuated dramatically through today’s session, as upbeat UK data initially buoyed the Pound (GBP) before US inflation hit 9.1% and sparked US Dollar (USD) support. ‘Greenback’ investors have now turned hawkish, however, as recession fears mount.

At the time of writing, GBP/USD is trading at $1.1906, up 0.2% from today’s opening levels.

Pound (GBP) Initially Gains on GDP Data

The Pound enjoyed knee-jerk upside this morning in response to May’s GDP release, which revealed that the UK’s economy expanded by 0.5% the month before last.

The data was expected to show stagnation as inflationary pressures abounded and economic activity was capped by volatile trade relations and cost-of-living headwinds. However, the economy instead benefitted from increased industrial production (1.4%) and rising services output.

As predicted, the scaling down of the Covid-19 vaccination and testing programs weighed upon services activity, but this was offset by new heath and social work activities, which may have previously been limited by lockdown measures.

Darren Morgan, director of economic statistics at the ONS, commented: ‘Health was the biggest driver with many more peoples seeing GPs, despite test and trace and the vaccination programmes winding down.’

Capping Sterling gains, however, were concerns that June’s GDP may fall on account of the two bank holidays that month; May had one less bank holiday than usual as the Jubilee break was moved to June.

Analysts at Lloyds Bank observe that this may result in the contraction of Q2 GDP growth overall.

Further dampening GBP appeal later in the day was a fresh wave of risk-off sentiment, triggered by alarmingly high inflation in the US. As central banks increase the pace of their policy tightening measures to curtail price hikes, the risk of causing a recession is increased.

US Dollar (USD) Firms on Inflation, Wavers Through Afternoon Trading

The US Dollar jumped following the release of American inflation data this afternoon, as the consumer price index for June printed at 9.1%.

The news most likely buoyed the ‘Greenback’ because of the pressure it puts upon the Federal Reserve bank to hasten its monetary policy tightening schedule. The Fed has already struck a hawkish tone in recent days, committing to a 50-75bps interest rate hike at its next meeting.

In a speech yesterday, President of the Federal Reserve Bank of Richmond Thomas Barkin said ‘we want to get back to somewhere in the range of neutral as expeditiously as we can without inadvertently causing damage we don’t want to cause.’

Tailwinds were somewhat capped, however, as the Bank of Canada (BoC) raised interest by a full percentage point to 2.5%. The Fed’s reputation as the most hawkish central bank is called into question and the bank now faces pressure to keep up with its counterpart in Canada.

Moreover, a lack of continuity between headline and core inflation may have helped limit inflation-based upside as June’s core figure fell marginally to 5.9% from 6 in May. Nevertheless, base effects mean that annual core inflation could pick up once more in Q3 to offset any downside from the recent fall in oil prices.

James Knightley, chief international economist at ING, warns that the risk of a recession in America is increasing, as exemplified by today’s data:

‘The Federal Reserve now acknowledges the onus is on them to hit the brakes on demand via higher interest rates. But by delaying their response and now having to move policy faster and deeper into restrictive territory, there is clearly the fear of a recession.’

With this in mind, the ‘Greenback’ inched lower toward the end of the European session.

GBP/USD Exchange Rate Forecast: US Data to Drive Movement?

Looking ahead, the UK lacks significant data in tomorrow’s session, leaving the Pound US Dollar exchange rate to trade on US economic data and external factors.

US PPI may support faster policy tightening measures from the Fed if it reveals that producer price pressures increased in June alongside consumer prices; however, the data is predicted to print marginally lower than last month on an annualised basis. This could trigger USD downside on a further lack of continuity across inflation data.

Elsewhere, any political stimuli from the UK could affect GBP/USD, if the country comes any closer to appointing a new prime minister. A greater degree of certainty in UK politics would likely buoy GBP as Sterling is negatively affected by volatility.

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