Pound to US Dollar Exchange Rate Plunges on Underwhelming UK Inflation Results
Solid demand for the US Dollar (USD) ahead of the Federal Reserve’s June policy decision made it easier for the US currency to drag the Pound to US Dollar (GBP/USD) exchange rate lower on Wednesday, following disappointing UK inflation results.
Last week saw the Pound (GBP) climb due to US Dollar weakness and GBP/USD advanced from 1.3347 to 1.3400.
Since markets opened this week though, Sterling has struggled to hold its ground and on Wednesday morning GBP/USD slumped to trend near lows of 1.3320.
Sterling has been pressured by a mixed UK jobs report, and now further signs that UK price pressures are subdued have weighed on Bank of England (BoE) interest rate hike bets.
Meanwhile, the US Dollar has benefitted from market demand for safe haven currencies, as well as anticipation for June’s Federal Reserve policy decision.
Pound (GBP) Exchange Rates Slump as UK Inflation Fails to Recover
Analysts had forecast that following a slip in UK inflation seen in April would begin to recover in May, but May’s UK Consumer Price Index (CPI) report came in short of expectations during Wednesday’s European session.
Britain’s inflation rate remained at 0.4% month-on-month as forecast, but the yearly inflation rate unexpectedly remained at 2.4% rather than climbing to 2.5% as many economists expected.
The core inflation figure also remained unchanged, at 2.1%.
Following the report, investors became more concerned that UK price pressures remained weak – especially after UK wage growth results disappointed investors earlier in the week too.
Some analysts noted that upcoming gains in inflation are likely to be limited too. According to Suren Thiru from the British Chambers of Commerce (BCC):
‘any pick-up in inflation would be relatively short-lived, with price growth likely to resume its downward path later in the year as the pressure from oil prices eases.’
As a result of the dimmed price pressures outlook, Bank of England (BoE) interest rate hike bets weakened and so did the Pound outlook.
US Dollar (USD) Exchange Rates Solid as Markets Await Federal Reserve
While US Dollar demand is not as broad as it was last month, the US currency’s outlook is still solid and the currency is unlikely to fall far unless the US economic outlook worsens.
As a result, the Pound’s gains last week were limited and the US Dollar was able to push GBP/USD lower this week so far.
The US Dollar has been supported by market demand for safe haven currencies, following market expectations that major Central Banks around the world are moving away from accommodative monetary policy.
Solid US data has helped the US Dollar too. Tuesday saw the publication of May’s US inflation results, which beat expectations in the overall yearly print by coming in at 2.8% rather than the expected 2.7%.
Pound to US Dollar (GBP/USD) Forecast: Federal Reserve in Focus
If the Federal Reserve policy decision surprises investors on Wednesday evening it could change the trajectory of Pound to US Dollar (GBP/USD) exchange rate trade for the remainder of the week, as well as the longer-term US Dollar outlook.
The Federal Reserve is expected to make its second 2018 US interest rate hike during Wednesday’s decision, but with three 2018 rate hikes already priced in traders will be looking for potential changes in the bank’s tone.
For example, if the Fed indicates that its view of the US economy has become more hawkish, Fed rate hike bets may rise and GBP/USD could see further losses later in the week.
On the other hand, if the Fed is more cautious than markets expect then GBP/USD could recover some of its losses.
Thursday will see the publication of key retail sales data from both the UK and US, which could also prove influential if they surprise traders.
If Britain’s May retail sales results were much better than expected, it could bolster hopes that UK consumer activity has seen a strong rebound which would leave the Pound to US Dollar (GBP/USD) exchange rate more appealing.