The outlook for GBP USD became more positive this morning with UK inflation hitting a five-year high in September.
Consumer prices in the United Kingdom increased by 3% in September year-on-year, in line with expectations and ramping up from the previous month’s annual reading of 2.9%.
This is the highest rate of inflation that the UK has experienced since April 2012, with rising prices of transport, leisure activities and, most importantly, food, pushing the figure continually beyond the Bank of England’s (BoE) target.
‘Life is getting much more expensive with an increase in the cost of food, fuel and a last-minute price spike in flights all contributing to the rise in inflation,’ stated Maike Currie, Investment Director at Fidelity International.
‘Meanwhile, our pay packets have stagnated with wage growth falling behind inflation, despite UK unemployment being at a record low’.
GBP/USD Exchange Rate Forecast to Correspond with BoE’s Reaction to Inflation
A 3% rise is consistent with the BoE’s October forecast and gives further credence to the concerns expressed by central bank Governor Mark Carney and the majority of the members of the Monetary Policy Committee (MPC) who have shifted significantly towards tighter monetary policy in recent weeks.
Beyond this, the latest snapshot of the UK’s labour market is due tomorrow, with average weekly earnings forecast to only have grown 2% year-on-year in August.
Currie’s analysis here is pertinent, in that weak wage growth combined with rising levels of inflation presents a danger to households, perceivably increasing the pressure for an interest rate hike.
This news is consistent with the expectation that the MPC will move to raise interest rates in November and, understandably, this has driven demand back to the Pound, with markets predicting an 82% chance of a rate hike before the inflation figures were even released.
Upbeat Comments from Fed Chair Yellen Bolster USD Exchange Rates
Whilst the Pound has taken the lead over the US Dollar today, it’s not alone in being bolstered by the prospect of a 2017 rate hike from its central bank.
US Federal Reserve Chairman Janet Yellen made some pertinent comments on Sunday whilst discussing the state of the US economy, asserting that the damage wrought by the recent storms is minimal, temporary, and will soon result in a rebound.
Yellen also acknowledged that consistently low inflation this year had been a surprise, but she also claimed that she expects it to pick up when temporary lagging factors begin to recede.
These comments suggest that the Fed may soon be back on track in raising interest rates, with the third (and final) rate hike for 2017 expected to come in December, though this is notably behind the forecast of the BoE, which is expected to push for a 0.25 basis point rise in November.
In this sense, the Pound is currently the more attractive option for investors – something that may well increase as the November policy meeting approaches.
This could, however, change following Janet Yellen’s speech on Friday, where she is due to discuss monetary policy since the financial crisis.
If she changes her outlook to one of caution then the likelihood of a December rate hike from the Fed could diminish, allowing the Pound to capitalise even further.
Markets will, nonetheless, be keeping a careful watch on this week’s remaining data prints, with today’s US import and export prices, manufacturing SIC production figures and NAHB housing market index all liable to provoke fluctuations within GBP USD.
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