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Pound to US Dollar Exchange Rate Outlook Higher on UK Inflation Report

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Pound to US Dollar Exchange Rate Trends Near Best Levels as Sterling Benefits from Risk-Sentiment

Investors have been less eager to keep buying safe haven currencies like the US Dollar (USD) this week, despite rising trade tensions between the US and China. This has made it easier for the Pound to US Dollar (GBP/USD) exchange rate to strengthen.

Since opening this week at the level of 1.3070, GBP/USD has climbed almost a cent and has sustained most of its gains too. Overnight, GBP/USD touched on a high of 1.3173, its best levels in over a month. At the time of writing on Wednesday, GBP/USD trended in the region of 1.3156.

Safe haven demand has faded, despite worsening trade action between the US and China, causing the US Dollar to weaken this week.

Speculation that the latest trade escalations between the US and China had been less severe than analysts expected made investors feel a little more comfortable in taking risks.

Pound (GBP) Exchange Rates Climb as UK Inflation Beats Forecasts

For most of the week so far, Sterling has been supported by hopes that UK-EU Brexit negotiations are accelerating while fears of a worst-case scenario ‘no-deal Brexit’ lighten.

On Wednesday though, the Pound saw a more solid boost in demand as Britain’s August Consumer Price Index (CPI) inflation report beat forecasts.

UK inflation was forecast to have risen from 0.0% to 0.5% month-on-month but instead jumped to 0.7%.

Similarly, the yearly inflation rate was forecast to slip from 2.5% to 2.4% but unexpectedly climbed to 2.7%.

According to the Office for National Statistics (ONS), who compiled the report:

‘Consumers paid more for theatre shows, sea fares and new season autumn clothing last month. However, mobile phone charges, and furniture and household goods had a downward effect on inflation.’

The news indicated that UK wages were not growing as strongly as first thought, however, which could concern Bank of England (BoE) policymakers.

For Pound investors though, the higher inflation rate bolstered BoE interest rate hike bets and made the British currency more appealing.

US Dollar (USD) Exchange Rates Lacks Fresh Supportive News

While US trade protectionism remains a broad uncertainty to forex markets and the US economic outlook is still strong, investors have had little reason to keep buying the already strong US Dollar this week.

Instead, investors have been selling the safe haven US Dollar from its best levels in profit-taking.

This has made it easier for a stronger Pound to capitalise against US Dollar falls, helping the Pound to US Dollar (GBP/USD) exchange rate to register solid gains.

Demand for the safe haven US Dollar would typically benefit from news that US-China trade tensions had worsened.

However, as the US will only implement a 10% tariff at first and move onto the previously planned 25% tariffs later, and China’s latest tariffs weren’t as severe as previously hinted either, market trade jitters actually lightened.

As US-China trade war escalations have been less severe than expected and recent US data has been mixed, investors have been selling the US Dollar from its best levels.

Pound to US Dollar (GBP/USD) Exchange Rate Outlook to be impacted by Brexit News

As it stands, the Pound to US Dollar (GBP/USD) exchange rate is on track to end the week around a cent higher, but there is still potential for news to highly influence both currencies towards the end of the week.

Notable US housing data from August will be published in the coming sessions, with housing starts and building permits coming this afternoon and key existing home sales figures due on Thursday.

September’s US PMI projections from Markit will be published on Friday and may also influence the US Dollar’s strength, but political developments are even more likely to influence GBP/USD movement.

Further news about US-China trade news could influence the US Dollar, particularly if they have an impact on risk-sentiment.

As for the Pound, investors are highly anticipating potential developments in UK-EU Brexit negotiations from this week’s EU summit, which will take place from Thursday.

Any signs that the issue of Ireland’s border is closer to some kind of solution could make the Pound much more appealing, and help GBP/USD to climb higher.

On the other hand though, if Brexit obstacles persist or the UK-EU negotiations don’t appear to make notable progress this week, ‘no-deal Brexit’ fears could worsen again and the Pound to US Dollar (GBP/USD) exchange rate could shed some of its recent gains.