Pound Sterling US Dollar (GBP/USD) Exchange Rate Muted as Underlying US Inflation Rises by Most in 29-and-a-Half Years
UPDATE: The Pound Sterling US Dollar (GBP/USD) exchange rate remained flat on Wednesday afternoon. This left the pairing trading at around $1.3049.
The Dollar remained under pressure after the latest data showed US consumer prices rose more than expected in July.
Added to this, underlying inflation jumped by the most in 29 and a half years as the costs of goods and services increased.
Although, the Labor Department noted it is unlikely this will mark the start of high inflation.
Paul Ashworth, chief U.S. economist at Capital Economics in Toronto noted:
‘This should end any speculation that the pandemic-related slump in demand will quickly push the economy into a deflationary spiral.
‘But this is not a sign that the U.S. is instead about to experience a bout of much high inflation because of supply restrictions.’
Pound Sterling US Dollar (GBP/USD) Exchange Rate Muted as UK Suffers First Recession in 11-Years
The Pound Sterling US Dollar (GBP/USD) exchange rate remained flat following the UK’s latest growth data. This left the pairing trading at around $1.3052.
Sterling remained muted today after the latest growth data showed the economy shrank by a record -20.4% between April and June. This saw the country enter its first technical recession in 11 years.
The British economy contracted when the coronavirus restrictions were the strictest. GBP also struggled to make gains as this was the largest contraction posted by any major economy so far during the crisis.
Sentiment remained under pressure as markets also expect a wave of job losses to hit the economy later this year when the furlough scheme ends in October.
However, GBP remained flat as there were some signs the economy was beginning to recover in June. Between May and June output jumped 8.7%.
Britain’s Chancellor, Rishi Sunak also noted there were some ‘promising signs’ that the economy was recovering. Although, he added that there was too much uncertainty to know if the country would have a swift v-shaped recovery.
Meanwhile, some analysts noted that it was likely the rebound in activity at the end of Q2 reflected a catch-up in activity that was suppressed during the lockdown.
According to Kieran Cleere, Director of Market Risk Solutions at Silicon Valley Bank:
‘The direction of the print was never in doubt. Markets finally got the answer to the first question being asked since preventative measures began, how bad is it going to be. The drop off in economic activity of 20.4% represents one of the deepest developed economies might see, and the deepest on record for the UK, but may be accounted for, in part, by the timing of the lockdown as compared with other economies. As well anticipated as the bad news was the Pound remained relatively sanguine, not giving up any of it’s recent strength against the Euro or Dollar.
‘The second question being asked by market watchers everywhere, how swift a recovery we might anticipate, also began to be answered. June’s monthly data offered the first window into the recovery as restrictions eased and the economy began to recoup some economic losses growing 8.7% month-on-month. The easier post-lockdown economic gains may soon be realized and so markets will be looking to establish how much of this momentum will be sustained.’
US Dollar (USD) Flat as Traders Focus on Washington
Meanwhile, the US Dollar remained flat against the Pound, but was able to rise against other safe-haven currencies.
The yield on 10-year US debt made its largest gain in two months during Tuesday’s session. This was ahead of the largest 10-year auction later today.
Meanwhile, the focus remained on Washington, which saw lawmakers clash over a new coronavirus stimulus package. Investors continue to look for signs the political impasse in Congress can be overcome.
The Dollar index was also able to extend last Friday’s rebound after Donald Trump’s ban on TikTok and WeChat weighed on sentiment.
Pound US Dollar Outlook: US Inflation in Focus Today
This afternoon could see the US Dollar (USD) edge lower against the Pound (GBP) as traders await the latest US inflation data.
The safe-haven USD could struggle if inflation slows more than expected and markets worry the US economy will underperform compared to its rivals.
Meanwhile, Sterling could edge higher if trader attention turns back to ongoing Brexit negotiations.
British Chancellor Rishi Sunak said that progress was being made in several areas of trade negotiations. However, he did not that there were gaps on ‘a couple of big issues’ between the UK and EU.
If reports suggest London and Brussels were making further progress despite the current stumbling blocks, the Pound US Dollar (GBP/USD) exchange rate will edge higher.