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Pound US Dollar Exchange Rate to Slump on Hawkish FOMC Minutes?

Pound US Dollar

GBP/USD Exchange Rate Firms as UK Inflation Cools to 17-Month Low

The Pound US Dollar (GBP/USD) exchange rate is strengthening as recession fears were offset by BoE tightening expectations.

At time of writing the GBP/USD exchange rate is around $1.2741, a 0.33% jump from this morning’s opening levels.

Pound (GBP) Rallies Despite Inflation Sharply Dropping

The Pound (GBP) is finding some renewed strength against some of its peers this morning in the wake of headline Consumer Price Index (CPI) easing from 7.9% to 6.8%.

Representing the lowest level since February 2022, a marked drop in energy prices drove inflation lower as the cost-of-living crisis eases somewhat. Further positive news is that prices are increasing at a slower pace than wages, the first time since autumn 2021. Matthew Corder, ONS Deputy Director of Prices, said of the data:

‘Inflation slowed markedly for the second consecutive month, driven by falls in the price of gas and electricity as the reduction in the energy price cap came into effect.’

However, the Office for National Statistics (ONS) also revealed that core inflation ticked higher than remaining unchanged. Also, with inflation still a long way off from the 2% target level of the Bank of England (BoE). With expectations of further tightening, GBP investors could be buoyed. Ruth Gregory, UK Analyst at Capital Economics, said:

‘There will be one more labour market and one more inflation release before the Bank of England’s September policy meeting. But with wage growth and services inflation both stronger than the Bank had expected, it seems clear that the Bank has more work to do.’

Looking ahead, a lack of data until Friday could see movement from market sentiment as investors digest the latest inflation data. Lingering fears of a recession could overshadow rate hike bets, which could see Sterling slip.

US Dollar (USD) Undermined by Cautiously Optimistic Market

Meanwhile, the US Dollar (USD) is fairly quiet today amid a lack of economic data.

Yesterday’s stronger-than-expected retail sales is weighing on USD investors’ minds as September’s interest rate decision looms. Minneapolis Federal Reserve President Neel Kashkari commented yesterday that inflation progress is positive, but reiterated it remains far too high. He added:

‘The question is, have we done enough, or do we need to do more.

Turning to this evening, the minutes of the Federal Reserve’s July policy meeting will be released., USD investors will be closely monitoring for any confirmation of the central bank’s next move. As it stands, the probability of another hike from the Fed sits at 10%. However, if the minutes appear hawkish, combined with strong economic data, heightened expectations of another rate increase could boost the ‘Greenback’.

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