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Pound US Dollar (GBP/USD) Exchange Rate to Drop Lower on US Tapering Hints?

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GBP/USD Exchange Rate to Fall as Fed Stance Revealed?

The Pound (GBP) has risen this morning against the US Dollar (USD) on the back of positive UK inflation data. Investors now await the testimony of Federal Reserve Chairman Jerome Powell to inform further trading.

At the time of writing, the Pound (GBP) trades at $1.3856, up 0.3% from today’s opening levels.

US Dollar (USD) Set to Gain on Hawkish Powell Testimony

GBP/USD trading is subdued this morning as investors wait for Chairman Powell’s testimony in order to gauge US Dollar prospects. The testimony is on everybody’s radar, as it may hint at when the bank is likely to consider tapering its $120 billion/month bond-buying scheme.

Rob Carnell, ING’s Head of Research for the Asia-Pacific region, remarks:

‘Against the background of higher, longer U.S. inflation, a taper coming earlier seems to be the likely direction of travel as far as policy goes.’

Not everyone is convinced though, as economists at JP Morgan and the Navy Federal Credit Union agree that inflation appears to be transitory, in line with Fed expectations.

If Powell strikes a more dovish tone at this afternoon’s testimony, Greenback support may fade. On the other hand, if higher prices are perceived to be persistent and the Fed indicates imminent tapering, USD prospects could be boosted.

British Pound (GBP) Holding Steady on Better-Than-Expected UK Inflation Data

The printing of UK inflation data this morning revealed that inflation grew by 2.5% in June, above estimates of 2.2%. The news has helped the Pound to rebound against the US Dollar after America reported significant inflation of its own during yesterday’s session.

Sterling gains are likely to be limited through the rest of today’s session. Bank of England (BoE) economists are faced with a decision regarding monetary policy, but will unlikely take immediate action as per earlier remarks that inflation will peak above 3% before falling back.

Looking forwards, BoE policymaker Dave Ramsden is due to give a speech this evening, which may give further insights into the Bank of England’s forward guidance, with the potential to drive GBP movement into tomorrow’s session. Economist James Sproule from Handelsbanken comments: ‘unwinding of the quantitative easing program should be a consideration this autumn’, raising the possibility of early tapering remarks.