The Pound to US Dollar (GBP/USD) exchange rate has deteriorated today, following the news that UK inflation rates slowed in March.
Some economists had predicted that this result would trigger a Pound (GBP) rally, but Sterling has fallen because of changing perceptions.
There is now a growing concern that with inflation pressures easing off, the Bank of England (BoE) may no longer be considering a May interest rate hike.
(Last updated 18th April, 2018)
The earlier historic high in the Pound to US Dollar (GBP/USD) exchange rate has faded today, with Sterling trading lower around $1.4301.
This deterioration is mainly because the US Dollar (USD) has made a sharp recovery over the afternoon, following a speech from John Williams.
The Fed official, who is voting on interest rate decisions in 2018, has forecast that US inflation rates will reach the bank’s 2% target this year.
On or above-target inflation increases the chances of the Fed raising interest rates; three more rate hikes are currently penciled in by USD traders.
(First published 17th April, 2018)
Chance of Best GBP/USD Exchange Rates since Brexit on BoE Interest Rate Hike
The Pound (GBP) has recently traded at its best exchange rate against the US Dollar (USD) since the EU Referendum, hitting a high of $1.4372.
This favourable GBP/USD exchange rate has been caused by the news that UK wage growth has risen above the pace of inflation in February.
The news has raised hopes that the Bank of England (BoE) could be forced to act and raise UK interest rates in May, from 0.50% to 0.75%.
Such a move by the UK central bank could trigger a Pound to US Dollar (GBP/USD) rally, along with better Pound exchange rates elsewhere.
Among the economists forecasting a UK interest rate hike in the month ahead has been Fidelity International’s Tom Stevenson.
Outlining the case for a near-term BoE rate hike, Mr Stevenson has said;
‘The BoE now has the catalyst to be able to follow through on its plans to raise interest rates at the next MPC meeting in May and start the move back towards monetary normality’.
Are Further GBP/USD Gains ahead on Forecast UK Inflation Rate Slowdown?
Before a May BoE interest rate decision, the Pound to US Dollar (GBP/USD) exchange rate could be strongly influenced by UK inflation rate data out on 18th April.
Analysts are currently divided about whether the year-on-year inflation rate reading for March, which will be compared to March 2017, will rise or remain static.
Growth in this reading might worsen Pound exchange rates, because it could spark fears that the state of wages overtaking inflation will be short-lived.
If inflation does exceed wage growth then UK consumers will be back in wage squeeze conditions, which could lower the chances of the BoE raising interest rates.
Claiming that current UK economic conditions don’t support a near-term rate hike anyway, Samuel Tombs of Pantheon Macroeconomics has said;
‘[The] latest UK wage data place little pressure on the [BoE] to hike next month. Year-over-year wage growth is rising only due to extreme weakness in early 2017’.
US Dollar to Pound (USD/GBP) Exchange Rate Forecast: Can USD Rally on Federal Reserve Optimism?
The US Dollar (USD) has struggled against the Pound (GBP) recently, but could recover this week as a number of high-impact Federal Reserve speeches are incoming.
Fed policymakers from across the spectrum will be speaking over 18th, 19th and 20th April, with regular members and voters on monetary policy giving remarks.
Among the speakers to watch out for are William Dudley on the 18th, along with Randal Quarles on the 19th and John Williams on the 20th.
Both Mr Dudley and Mr Williams are considered ‘hawkish’, so they could boost US Dollar exchange rates with their speeches.
USD traders are pricing in at least three interest rate hikes in 2018 – confirmation by Fed officials could lead to the Pound to US Dollar (GBP/USD) exchange rate declining.
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