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Could US And UK Inflation Data Extend Pound US Dollar (GBP/USD) Exchange Rate Gains?

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Pound US Dollar (GBP/USD) Exchange Rate Gains Ground Ahead of US Inflation Data

Ahead of the weekend the Pound to US Dollar (GBP/USD) exchange rate surged higher, benefitting from market jitters over the latest US consumer price index data.

Forecasts point towards a modest uptick in core CPI on the month, with price pressures increasing marginally over the festive period.

As analysts at Westpac commented:

‘Annual core CPI inflation is currently at 1.7%yr, a level that has been maintained for the past six months.

‘Come December, a 0.2% rise in headline and core inflation is expected as energy price inflation abates and food remains broadly neutral. If the monthly gain comes in as expected, then annual core inflation will hold at its current level.’

This could see the US Dollar (USD) recover some ground on Friday afternoon, even though the CPI is not the Federal Reserve’s preferred measure of inflation.

On the other hand, any disappointment is likely to encourage further doubts over the likelihood of the Fed raising interest rates again in the near future, to the detriment of USD exchange rates.

GBP/USD Exchange Rate Volatility Forecast on UK Inflation Figures

Confidence in the Pound (GBP) could pick up in the coming week, with the latest UK CPI data offering the GBP/USD exchange rate a potential rallying point.

While inflationary pressure is forecast to have fallen back slightly from 3.1% to 3.0% on the year in December this may not be enough to boost GBP exchange rates, however.

Although an easing in price pressures would bode well for squeezed consumers this could also discourage the Bank of England (BoE) from raising interest rates again.

Investors are unlikely to greet the prospect of the BoE sitting on its hands for longer, even if rising inflation is bad for the economy at large.

A fresh uptick in inflation could provoke some marked volatility for the GBP/USD exchange rate, though.

Fed Rate Hike Speculation Forecast to Provoke Further US Dollar (USD) Jitters

Political developments in the US could boost the GBP/USD exchange rate, particularly if the Trump administration continues to entrench its protectionist mind-set.

Speculation that the US could be pulled out of NAFTA weighed heavily on the domestic outlook, with the demise of the trade agreement likely to have a negative impact on economic growth.

Commentary from various Fed policymakers will also be in focus in the near term, with markets still weighing up the odds of the central bank taking a more aggressive pace of monetary tightening.

Unless policymakers continue to express a more hawkish outlook on the whole then the US Dollar is likely to remain under some degree of downside pressure.

However, any suggestions that an increasing proportion of the Federal Open Market Committee (FOMC) favour three or more interest rate hikes over the course of 2018 could see USD exchange rates rally strongly.