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Pound US Dollar Exchange Rate to Climb on Increased BoE Rate Hike Bets?

Pound Sterling and US Dollar notes

GBP/USD Exchange Rate Wavers as UK Inflation Remains in Double Digits

The Pound US Dollar (GBP/USD) exchange rate is fluctuating this morning despite hotter-than-expected inflation data in the UK.

At time of writing the GBP/USD exchange rate is around $1.2418, relatively unchanged from this morning’s opening levels.

Pound (GBP) Undermined by Shaky Economic Outlook

The Pound (GBP) is experiencing mixed success this morning in the wake of hotter-than-expected inflation. Despite elevating bets for another rate hike from the Bank of England (BoE), the uncertain economic outlook of the UK is limiting gains.

Against expectations of headline CPI easing to 9.8%, annualised inflation in the UK remains in double digits as it sits at 10.2%. The Office for National Statistics (ONS) revealed that after last month’s surprise increase in inflation, a sharp increase in food inflation offset the falls in energy prices. Rising at the sharpest rate since 1977, food and non-alcoholic inflation surged by 19.1%. Grant Fitzner, Chief Economist at ONS, commented:

‘The main drivers of the decline were motor fuel prices and heating oil costs, both of which fell after sharp rises at the same time last year. Clothing, furniture and household goods prices increased, but more slowly than a year ago.

However, these were partially offset by the cost of food, which is still climbing steeply, with bread and cereal price inflation at a record high.’

Looking ahead, the Pound could climb on increased rate hike expectations. With the markets now pricing in a 97% chance that the central bank will raise the cash rate to 4.5% at the May meeting, Sterling could rally. However, with the cost-of-living crisis rumbling on, weighing on the UK economy, the Pound could be muted amid mounting inflationary pressures on millions of households.

US Dollar (USD) Supported by Increased Rate Hike Bets

Meanwhile, the US Dollar (USD) is finding some modest support in the wake of hawkish Federal Reserve policymakers. Despite downbeat data and a modestly improving risk appetite, the ‘Greenback’ is finding some modest strength on the back of hawkish comments from Atlanta Fed President Raphael Bostic.

Speaking to CNBC, Bostic claims that the Fed will increase interest rates at least one more time before pausing. With the US economy still going strong with plenty of momentum, Bostic reiterates how high inflation remains. He added:

‘One more move should be enough for us to then take a step back and see how our policy is flowing through the economy, to understand the extent to which inflation is returning back to our target.

‘By pretty much every measure that you look at, current inflation is more than double what our target is. So there’s still more work to be done and I’m ready to do it.’

Looking ahead, the US Dollar could be left to trade on market sentiment until tomorrow. Initial jobless claims could point to the labour market cooling somewhat, as the figure is expected to edge higher.

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