Pound US Dollar (GBP/USD) Exchange Rate Bolstered by US Inflation Slowdown

April 12, 2023 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Bolstered by US Inflation Slowdown

Pound US Dollar (GBP/USD) Exchange Rate Buoyed by US Inflation Data

The Pound US Dollar (GBP/USD) exchange rate rose on Wednesday. The pairing found support from evidence of a slowdown in US inflation, as well as a risk-on mood.

GBP/USD’s gains were capped by stubbornly high US core inflation, however.

At time of writing the GBP/USD exchange rate was at around $1.2466, which was up roughly 0.3% from that morning’s opening figures.

US Dollar (USD) Plunges as March’s Inflation Slows

The US Dollar (USD) cratered on Wednesday following the release of the latest US inflation data. USD fell to one-week lows against a basket of its peers. The safe-haven ‘Greenback’ also came under pressure from a return of global risk appetite.

March’s headline inflation fell by more than forecast on Wednesday to 5% from 6% in February. Core inflation ticked higher to 5.6% however, with the prospect of additional Fed rate hikes cushioning USD’s losses.

Speaking on the inflation figures, James Knightley of ING said:

‘US inflation slowed to 5% from 6% YoY, but the monthly increases in non-food and energy prices continue to run hotter than desired, giving the Fed justification to hike interest rates again in May, Nonetheless, higher borrowing costs and reduced credit availability mean the risks of a hard landing are on the rise and this will get inflation down quickly.’

Pound (GBP) Slips despite Hawkish Bailey Comments, Climbs Against USD

The Pound (GBP) weakened on Wednesday amid mixed signals from BoE policymakers. However, Sterling made gains against a weaker US Dollar (USD).

BoE rate setters have given opposing hints in recent weeks regarding the central bank’s forward path of policy tightening. Sterling’s losses continued to be cushioned by markets bets on a 25bps rate hike at the BoE’s next meeting, however.

GBP found further support from hawkish comments by BoE Governor Andrew Bailey on Wednesday. Bailey signalled that the central bank would push ahead with its monetary policy regardless of any global financial instability.

Regarding the BoE’s path, Professor Costas Milas of the University of Liverpool had the following analysis:

‘MPC members should decide on the next interest rate move in early May largely based on next week’s CPI inflation reading which should hopefully show a significant drop in inflation from its current 10.4% reading.’

GBP/USD Exchange Rate Forecast: Will UK GDP Data Boost the Pound?

Speeches from other BoE policymakers may also provide additional signals concerning the central bank’s forward path. BoE Chief Economist Huw Pill’s speech on Thursday could keep GBP buoyed if he maintains his previously hawkish stance.

On the other hand, a speech from notably dovish rate setter Silvana Tenreyro on Friday could temper any bets on additional BoE hikes and dent enthusiasm for Sterling.

Also on Thursday, the Pound could be lifted by the latest GDP data. The UK’s economy is forecast to have expanded by 0.1% in February. Investors could take heart from the possibility that the UK may avoided a deep recession in 2023.

On the other hand, the rate of expansion is set to slow from a 0.3% expansion in January. This could temper Sterling’s gains if markets take it as a sign of a slower pace of recovery in the UK’s economy.

The US Dollar could find support on Thursday if March’s core PPI rises as forecast. The data is set to reaffirm the need for further interest rate hikes from the Fed amid persistent inflationary pressures.

Thursday’s jobless claims figures could also push USD higher if they print as forecast. Claims for the week ending April 8 are expected to remain close to previous levels, which traders may take as a sign of still-tight labour market.

The US Dollar could struggle to gain any ground on Friday in the face of potentially disappointing data releases. March’s retail sales are expected to decline by 0.4%, whilst consumer sentiment is set to remain unchanged at a low of 62.

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