Pound-to-Dollar Exchange Rate Slides on US Inflation Shock

February 13, 2025 - Written by Tim Boyer

STORY LINK Pound-to-Dollar Exchange Rate Slides on US Inflation Shock

The Pound held firm against the U.S. Dollar ahead of Wednesday’s US open before sliding after a stronger-than-expected US inflation release triggered fresh market concerns.

Underlying market tensions remained high amid ongoing uncertainty and unease over the US Administration's trade policies. After initially struggling, the dollar posted renewed gains.

From highs at 1.2465, the Pound to Dollar (GBP/USD) exchange rate dipped sharply to 1.2380.

ING sees scope for GBP/USD to retreat to 1.2250 this week.

The Pound to Euro (GBP/EUR) exchange rate edged back below the 1.2000 level.

Rabobank expects a 1.1900 - 1.2050 short-term GBP/EUR trading range but forecasts an advance to 1.2270 at the end of 2025.

There were no significant domestic developments which ensured a market focus on the US.

US consumer prices increased 0.5% for January, above consensus forecasts of 0.3% with the year-on-year rate increasing to 3.0% compared with expectations of an unchanged 2.9%.

Core prices increased 0.4%, also slightly above expectations of 0.3%, with the annual rate at 3.3% from 3.2% and above forecasts of 3.1%.

The data will trigger fresh reservations over inflation trends and there will also be fresh fears that the Federal Reserve will not be able to cut interest rates in the near term.

Traders are now pricing in less than a 35% chance of a rate cut by June.

According to Spartan Capital Securities Chief Market Economist Peter Cardillo, “Today's data confirms that inflation is still a problem, and obviously it upholds the Fed's stand on being cautious in lowering interest rates. Coupled with the prospects of the tariffs, it adds to inflation worries.”

He added, “If it keeps up like this another month or two of these kinds of numbers, that probably means that the Fed is likely to stay on hold for the remainder of the year.”

Imre Speizer, currency strategist at Westpac, took a similar view; "A stronger (inflation) number could price that out even further. I wouldn't be surprised if that pushed it out to next year.”

Markets are also wary over a further round of tariff announcements from President Trump.

According to ING, “The challenge for traders is that, despite some fatigue in the Trump trades, there's no way to predict if tomorrow will be the day Washington significantly expands tariffs. That's why we're reluctant to call a meaningful dollar correction without some kind of macro-supporting evidence.”

It added, “a new round of tariffs could easily blow any ideas of a dollar correction out of the water.”

Markets will be watching the UK GDP data release closely on Thursday.

Rabobank senior FX strategist Jane Foley commented, "Confidence in the UK has been knocked because of the growth outlook. I think sterling is going to struggle to find the enthusiasm that it had in parts of 2024."

She still thinks the Pound is less vulnerable than the Euro.

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TAGS: Pound Dollar Forecasts