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Pound US Dollar Exchange Rate to Bolster on Softening US Inflation?

Pound US Dollar

GBP/USD Exchange Rate Strengthens amid Tight UK Labour Market

The Pound US Dollar (GBP/USD) exchange rate is rallying this morning in the wake of mixed UK jobs market data. A maintained low unemployment rate is offset by record tumbling real wages. However, an improving market mood kept Sterling buoyed.

At time of writing the GBP/USD exchange rate is around $1.2188, a 0.32% climb from this morning.

Pound (GBP) Supported by Increased Rate Hike Expectations

The Pound is rallying this morning after the labour market remained tight after unemployment remained at 3.7% for the third consecutive month. The number of employed individuals rose beyond expectations of 40k and increased by 74k.

However, real terms pay, when adjusted for inflation, fell by 3.1%. The Office for National Statistics (ONS) recorded the fall in wages, when adjusted for inflation, was amongst the biggest falls since records began in 2001. Stephen Evans, Chief Executive of Learning and Work Institute warned that the UK has suffered from 15 years of stagnating wages. Evans added:

‘Real earnings are falling at their fastest rates since the financial crisis due to high inflation, leaving them no higher now than before the pandemic. A miserable 15 years for real wage growth means people would be earning £11,000 a year more on average if pre-financial crisis trends had continued.’

Looking ahead, Sterling could increase their lead with the latest headline CPI due to print tomorrow. Unlike most of the major economies, the UK is set to continue enduring sky-high inflation. An expected modest softening to 10.3% is unlikely to be cheered by the millions of households struggling in the cost-of-living crisis, but GBP investors could be. An expected continuation of rate hikes from the Bank of England (BoE) could bolster Sterling.

US Dollar (USD) Undermined by Improving Market Mood

Meanwhile, the US Dollar (USD) is struggling for demand this morning, as USD investors once again move to the sidelines ahead of the US inflation data.

An expected further softening of headline CPI could sour investor moods and cheer the wider global market. With growing expectations of the Federal Reserve finally slowing their tightening cycle, risk sentiment could vastly improve, sapping demand for safe-haven currencies such as the ‘Greenback’.

Looking ahead, all eyes will be on the latest headline inflation data. Markets predict a seventh consecutive softening, with the CPI expected to fall to 6.2%. The speed in which inflation is reducing could significantly reduce rate hike bets, hampering the US Dollar.

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