Pound US Dollar (GBP/USD) Exchange Rate Narrows as Bearish Trade Counters Elevated UK CPI

April 19, 2023 - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Narrows as Bearish Trade Counters Elevated UK CPI

Pound US Dollar (GBP/USD) Exchange Rate Narrows as Bearish Trade Counters Elevated UK CPI

The Pound US Dollar (GBP/USD) exchange rate traded in narrow boundaries at the beginning of Wednesday’s European session. While GBP was supported by red hot UK inflation, a sour market mood kept the safe haven US Dollar elevated.

At the time of writing, GBP/USD traded at around US$1.2414, showing little movement from Wednesday’s morning rates.

Pound (GBP) Rallies as UK Inflation Remains Higher-than-Expected

The Pound (GBP) strengthened on Wednesday, following the publication of the latest UK consumer price index data.

March’s figures showed that headline inflation remained hotter than forecast, printing at 10.1%. Core inflation, meanwhile, remained level at 6.2%.

The cause was shown to be a shock rise in food prices, which increased by 19.1% - rising at the fastest pace in over 45 years.

With headline inflation sticking at over five times the Bank of England’s (BoE) target rate the pressure mounted on the bank to deliver further tightening.

Professor Costas Milas, of the Management School at University of Liverpool, commented: ‘Inflation is therefore proving (much) more stubborn than what the Bank expects. So it makes sense to expect that the Bank’s Monetary Policy Committee (MPC) will raise interest rates further to 4.5% on 11th May. In fact, UK interest rates could potentially rise up to 4.75 per cent by the end of 2023.’

The expectation emerged amongst investors that the BoE may continue tightening after their May meeting, with bets being placed on a peak rate of between 4.75% and 5%.

Because of these elevated expectations, Sterling was able to climb against most major peers. However, a downbeat market mood prevent GBP from gaining clear ground over the safe haven US Dollar.

US Dollar (USD) Supported by Fed Rate Hike Bets

The US Dollar (USD) saw support on Wednesday, as a sour market mood coalesced with increased Federal Reserve rate hike bets.

Markets began to price an 86% chance of the Fed raising interest rates by 25 bps at their May meeting, and began to pull back on expectations of rate cuts later in the year, which prompted renewed strength in the ‘Greenback’.

Furthermore, investors may have moved to support USD as they await further speeches from Federal Reserve officials. With the pre-Federal Open Market Committee (FOMC) blackout in effect from the weekend, expectations have been raised for indications around a May rate hike.

However, these gains may have been tempered by a lack of impactful economic data releases. Wednesday brought with it a relatively bare data calendar, which may have prompted the US Dollar to trade on market sentiment.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: UK Data in Focus

Looking ahead for the Pound (GBP), the core catalyst of movement is likely to come on Friday, with a series of data releases.

This begins with the latest retail sales data, which is forecast to show that sales in March fell by 0.5% on a monthly basis. If this prints in line with economists’ predictions, it may weigh on the Pound by pointing to weakness in the UK retail sector.

This is then followed by private sector PMI flashes for April. With manufacturing activity forecast to show signs of improvement and the services index forecast to remain at 52.9, GBP could gain ground as it points to health in the UK economy.

For the US Dollar (USD), Thursday brings the latest set of initial jobless claims. With pressure continuing to remain on the Federal Reserve to control inflation, this set of claims could indicate the need for further hiking. If it remains tight as expected, it may reinforce the need for further tightening.

On Friday, the latest US private sector PMI flashes are due. April’s activity is forecast to show a similar picture the UK, but with manufacturing expected to show a slight cooldown in growth. If accurate, this could weigh on the ‘Greenback’ by pointing to some slowdown in the US economy.

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TAGS: Pound Dollar Forecasts