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Pound US Dollar Exchange Rate Struggles ahead of US Inflation

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Pound US Dollar (GBP/USD) Subdued ahead of US CPI Data

The Pound US Dollar (GBP/USD) exchange rate traded in a narrow range on Tuesday amid a cautious market mood. Towards the end of Wednesday’s European session GBP/USD traded slightly down on the day’s opening levels at $1.3544.

With a lack of notable UK and US data releases, investors held making aggressive bets ahead of the US consumer price index (CPI) publication on Wednesday.

Pound to Extend Losses on Slowing UK GDP Growth?

The Pound struggled against the US Dollar today after recovering some of last week’s losses on Monday.

Following the Bank of England’s (BoE) decision to leave interest rates unchanged at 0.1% last week, GBP/USD has struggled to regain significant ground.

In the absence of notable GBP data releases, the Pound has continued to lack direction.

Comments from BoE Governor Andrew Bailey earlier in the day also failed to drive significant movement in GBP on Tuesday.

Bailey largely reiterated last week’s sentiment that followed the BoE interest rate decision by saying the central bank will act and hike rates if evidence of higher inflation expectations drives up wages.

He said:

“What we’re concerned about … is once you start to get an increase in inflation of this sort we want to stop it becoming generalised in the economy.

“And that’s why we would, and will, have to act on interest rates if we see that evidence becoming clear.”

The Pound may continue coming under pressure this week, with GBP investors focusing on the UK’s third quarter GDP growth rate released on Thursday.

Forecasts point to growth slowing to 1.5% between July and September, down from 5.5% in the second quarter.

With concerns over rising inflationary pressure and slowing growth, the Pound may weaken, especially as some investors view the BoE’s policy stance as uncertain after last week’s surprise decision to hold interest rates.

US Dollar Firms on Safe-Haven Demand ahead of CPI Data

The US Dollar strengthened towards the end of Wednesday’s European session as risk-off market trade lifted demand for the safe-haven currency.

Market sentiment soured after the Federal Reserve Financial Stability report warned over the rise of risky assets, rising Covid-19 cases in Europe, and fears that the Chinese real estate crisis could spill over into global financial markets.

On the threat of a new wave of Covid-19 in Europe, the report said:

“Despite high vaccination rates, the emergence of new variants and a resurgence of Covid-19 infections could weigh on the ongoing recovery in Europe.”

While warning over the possible collapse of property developers in China such as Evergrande:

”Given the size of China’s economy and financial system as well as its extensive trade linkages with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States.”

Looking ahead, the key data release for USD investors will be the US inflation rate for October released tomorrow.

With headline inflation expected to rise to 5.8%, up from 5.4%, and core inflation forecast to rise from 4% to 4.3%, USD may experience volatility as investors look for insight as to whether soaring inflation could alter the Fed’s forward guidance.