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Pound US Dollar Exchange Rate to Reverse on Fed Interest Rate Decision?

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GBP/USD Exchange Rate Jumps as UK Inflation Leaps

The Pound US Dollar (GBP/USD) exchange rate strengthens in the wake of hotter-than-expected UK inflation, reviving interest rate hike bets from the BoE.

At time of writing the GBP/USD exchange rate is around $1.2288, a half percent jump from this morning.

Pound (GBP) Rallies on Increased Rate Hike Expectations

The Pound recovered its strength this morning as inflation surprised to the upside and leapt to 10.4%, against expectations of an easing to 9.9%.

An unexpected climb in headline CPI has sent Sterling rallying on renewed interest rate hike bets from the Bank of England (BoE). Amidst the turmoil in the banking sector, the central bank looked to pause the tightening cycle. However, with inflation creeping back up, the BoE might be left with no choice but to continue hiking, buoying GBP investors.

The price of food and non-alcoholic drinks contributed the biggest drive in costs in February, as they leapt by 18%, the highest since 1977. Salad and vegetables saw huge increases in prices due to bad weather in Southern Europe and Africa, and the continuing surge of energy prices pushed inflationary pressures higher.

Looking ahead, and GBP investors will be keenly awaiting the interest rate decision from the BoE tomorrow. With the probability of the central bank hiking by 25bps now sitting at 95%, a significant jump from an even split yesterday, Sterling could climb further if the BoE opts to hike. Kitty Ussher, Chief Economist at the Institute of Directors, is confident that the central bank’s job is far from over. Ussher added:

‘February’s CPI inflation rate is higher than expected, driven predominantly by high monthly price rises in food, hospitality, and clothing.

‘In recent days some have suggested that the febrile environment in the banking sector should give central banks pause for thought before raising rates further. Today’s data suggests the opposite; the Bank of England’s job is not yet done.’

US Dollar (USD) Undermined as Investors Brace for Fed Rate Decision

Meanwhile, the US Dollar (USD) is softening moderately this morning as investors move to the sidelines ahead of the interest rate decision from the Federal Reserve later today.

Expectations of the central bank to raise interest rates by 25bps is doing little to cheer investors amid predictions of a less-hawkish Fed. The easing fears of a banking crisis is also sapping demand for the safe-haven ‘Greenback’. As the recent collapse of two US banks, Silicon Valley Bank and Signature Bank, spooked the markets and speculations of rate cuts came to the fray, weighing on USD.

Looking ahead, the accompanying monetary policy statement from Fed Chair Jerome Powell could prove more insightful for USD investors than the policy decision itself. With updated economic projections and future monetary policy comments from Powell could influence the ‘Greenback’. Any hints of a possible slowdown, or even a cut, could weigh heavily on the US Dollar.

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