Pound US Dollar (GBP/USD) Exchange Rate Muted as UK Food Inflation Hits 18 Year High

March 28, 2023 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Muted as UK Food Inflation Hits 18 Year High

Pound US Dollar (GBP/USD) Exchange Rate Muted as UK Food Inflation Hits 18 Year High

The Pound US Dollar (GBP/USD) exchange rate narrowed during Tuesday’s session, as soaring inflation kept Sterling’s appeal low.

At the time of writing, GBP/USD traded at around US$1.2312, showing little movement from Tuesday morning’s opening rates.

Pound (GBP) Muted as UK Food Inflation Hits 18 Year High

The Pound (GBP) endured muted traded during Tuesday’s morning session, following the news that food inflation had hit a 15 year high.

Kantar released data on Tuesday morning which showed that UK food inflation climbed to 17.5% during March, adding an additional £837 to the average UK household’s grocery bill.

Due to the cost of living crisis embroiling the UK, sentiment seemed to wane towards Sterling as it demonstrated how badly UK consumers were being affected by inflation.

However, GBP may have been underpinned by hawkish remarks from Bank of England (BoE) speakers. On Monday evening, BoE Governor Andrew Bailey delivered a speech taken as hawkish to the London School of Economics.

He stated: ‘We have to be very alert to any signs of persistent inflationary pressures and if they become evident, further monetary tightening would be required. What monetary policy must do is ensure that inflation that has come to us from abroad does not become lasting’

Furthermore, commentary from Governor Bailey during his testimony to the UK Treasury committee on Tuesday could be cushioning Sterling. Bailey has reiterated the resilience of the UK’s banking sector, and has argued favourably towards the BoE’s approach to monitoring banks.

Because of this, GBP investors may be reassured over the security of the sector, preventing GBP from falling further against some of its peers.

US Dollar (USD) Weakens amid Upbeat Market Mood

The US Dollar (USD) weakened during Tuesday’s morning session, as an upbeat market mood prevented the safe haven currency from gaining much ground.

Risk appetite continued to return to investors as fears over further banking collapses appeared to continue easing amongst investors. The improving attitude towards the banking sector came after First Citizens acquired Silicon Valley Bank over the previous weekend, alleviating concerns over further collapses.

Furthermore, rate increase bets were calibrated by USD investors. With the Federal Reserve not offering much in terms of a hawkish narrative, the return to stability in the banking sector has not translated into elevated rate hike bets despite further room for tightening.

However, a rally in US Treasury bond yields likely cushioned the ‘Greenback’ during Tuesday’s session. With the yields ticking upward, may move to buy the dip later in the session.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: BoE Mann to Boost GBP?

Looking ahead for the Pound (GBP), Bank of England (BoE) policymaker Catherine Mann is scheduled to deliver a speech on Wednesday evening. If Mann takes a hawkish stance on inflation and points to a need for further interest rate hikes, Sterling could gain strength as investors increase their rate hike bets.

Beyond this, however, the data calendar remains relatively thin in the short term. Because of this, Sterling could be left vulnerable to domestic and external factors. As an increasingly risk sensitive currency, a decline in risk appetite could weigh on GBP.

With discussions continuing between ministers and unions, any sign that the recent waves of industrial action which are affecting the UK economy could be stopped may cheer GBP investors.

For the US Dollar (USD), the latest initial jobless claims figures for the week ending March 25th could provide some direction. Forecast to print at 196,000, the figures could reiterate the tightness of the US labour market, which may leave room for further tightening from the Federal Reserve.

Furthermore, the final Q4 GDP readings for the US are due to print on Thursday. If these figures show any significant deviation from the preliminary readings, they could sway the ‘Greenback’.

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