Pound US Dollar (GBP/USD) Exchange Rate Gains as UK Inflation Drives Rate Hike Bets
After dipping through the first part of this week’s session, the Pound US Dollar (GBP/USD) exchange rate is recovering some of its losses on Wednesday following the release of the UK’s inflation data for December.
GBP/USD has moved back above $1.36 to trade at $1.3631 at the time of writing as bets that the Bank of England (BoE) will raise interest rates at its February policy meeting offset concerns over a cost-of-living crisis.
Pound (GBP) Recovers Some Losses as UK Inflation Beats Forecast
The Pound (GBP) is attempting to recover some of this week’s losses against the US Dollar on Wednesday after December’s UK consumer price index soared to a 30-year high.
Inflation unexpectedly rising to 5.4%, above forecast of 5.2%, has further increased bets that the BoE will hike interest rates again at its next monetary policy meeting in February.
However, fears over a cost-of-living crisis have tempered Sterling’s gains after wage growth data released on Tuesday showed growth has fallen behind inflation, meaning a pay decline in real terms.
With inflation set to continue rising to peak around spring, worries have intensified that consumer spending could fall and lead to weaker UK economic growth in the fourth quarter of 2021 and through 2022.
Moreover, some investors are beginning to more gradual rate hikes from the BoE through 2022 as inflation becoming entrenched in wage growth appears less likely after the most recent data release, which has also limited GBP gains.
With an interest rate hike widely expected by markets in February, bets on how aggressively the BoE will tighten monetary policy through 2022 will likely continue driving movement in the Pound.
Meanwhile, the UK government appearing set to ease Covid-19 measures in the UK and ongoing UK political uncertainty caused by the Downing Street parties furore and calls for Prime Minister Boris Johnson to resign look likely to stoke additional volatility.
Forecasts for UK retail sales to contract -0.6% in December may weigh on GBP at the end of the week, with a negative reading fuelling fears over slowing UK economic growth.
US Dollar (USD) Pressured as US Treasury Yields Cool
The US Dollar (USD) is coming under pressure in midweek trade amid a pullback in US Treasury yields.
After hitting a two-year high yesterday when US markets reopened following Monday’s closure, US Treasury yields have cooled today.
Growing expectations for aggressive monetary policy from the Federal Reserve pushed yields higher and dampened market sentiment, which increased safe-haven demand for the US Dollar.
Investors are increasingly pricing in four rate hikes from the Federal Reserve in 2022, with the first expected in March.
With Federal Reserve policymakers entering the blackout period before the central bank’s meeting next week, and an absence of notable US data releases today, USD exchange rates lacked direction during Wednesday’s morning’s session.
Looking ahead, US Treasury yields and risk appetite will likely be the main drivers of the US Dollar in the coming days as investors begin to hold aggressive bets on Fed policy until it concludes its January meeting and provides some insight into its forward guidance.