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Pound US Dollar Exchange Rate to Slip on Further Slashed Fed Rate Hike Bets?

Stacks of US Dollar (USD) banknotes.

GBP/USD Exchange Rate Wavers as US Inflation Eases to 6%

The Pound US Dollar (GBP/USD) exchange rate is fluctuating after headline CPI in the US meets forecasts and drops to 6%, the lowest since September 2021.

At time of writing the GBP/USD exchange rate is around $1.2161, relatively unchanged from this morning.

US Dollar (USD) Undermined by Fed Rate Hike Uncertainty

The US Dollar (USD) is struggling for increased demand in the wake of easing inflation. Despite meeting market expectations and easing to 6%, Federal Rate hike bets have been cut further.

The latest reading from the US Bureau of Labor Statistics showed inflation in the US falling to 6% YoY, the lowest since September 2021 as inflationary pressures continued to ease. On a monthly basis, inflation modestly ticked up by 0.4%, also in line with expectations. However, the inflation rate still sits far above the Fed’s target rate of 2%, which could be providing some support for the ‘Greenback’.

Looking ahead, and USD investors will be keen to hear Fed Governor Michelle Bowman as she is set to speak later today. Any further indications or hints towards the Fed’s monetary policy going forward could impact the US Dollar. In light of the Silicon Valley Bank collapse, CME Group FedWatch have revealed that the market have priced in a 85% probability of a 25bps rate hike at the next meeting. This is leapt from just a 56% chance earlier in the day.

Pound (GBP) Undermined by Cooling Labour Market

Meanwhile, the Pound is failing to find much demand in the wake of mixed jobs data. Despite unemployment remaining at 3.7% for the fourth straight month, wage growth eased for the first time in over 12 months.

The latest labour market data was released by the Office for National Statistics (ONS) and revealed the jobs sector could finally be cooling. The Bank of England (BoE) closely monitors wage growth as a measure of inflationary pressures, and since today’s data revealed the first slowdown in a year, rate hike bets could be pared further.

Basic pay, excluding bonuses, rose by 6.5%, a modest slowdown from a previous 6.7% increase. However, real-terms wage growth actually fell by 3.2%, the biggest drop since the period from February to April 2009.

Looking ahead, GBP investors will be looking towards Chancellor Jeremy Hunt’s Spring Budget tomorrow. As Hunt unveils the UK government’s tax and spending plans for the coming year, the market will be keenly awaiting any growth plans. Hunt commented on today’s labour market and how it could impact the budget:

‘The jobs market remains strong, but inflation remains too high. Tomorrow at the budget, I will set out how we will go further to bear down on inflation, reduce debt and grow the economy, including by helping more people back into work.’

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