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Will GBP/USD Fall on Cooling Inflation?

Pound coins on top of banknotes

Pound US Dollar (GBP/USD) Exchange Rate Strengthens amid Red Hot Wage Growth Data

The Pound US Dollar (GBP/USD) exchange rate is firming this morning, as hotter-than-expected wage growth data supports Sterling.

At the time of writing, GBP/USD is trading at around US$1.2718, rising by over 0.2% from the morning’s opening rates.

Will GBP Weaken amid Cooling Inflation?

During today’s trade, the Pound (GBP) could continue to climb as investors bet on further interest rate hikes from the Bank of England (BoE).

This morning, the recent wage growth data surprised investors by showing record increases, whereas most economists had anticipated a cooldown. The BoE have consistently indicated that wage growth is a key inflationary pressure, thus sparking strength in GBP by prompting additional rate hike bets.

However, this may be being capped by a shock increase in unemployment. Over June, the amount of people out of work rose to 4.2%, up from 4%. This may indicate a loosening labour market, possibly dampening these bets.

Tomorrow, the latest UK inflation data is scheduled for publication. Both core and headline inflation are expected to cool to 6.8%.

If this data prints accurately, Sterling could weaken as it may indicate that inflation has firmly turned the corner. If true, the BoE may not need to hike rates much further, which would reduce bets and weigh on GBP.

Will USD Climb on Retail Sales Increase?

Over today’s session, the US Dollar (USD) may strengthen after the publication of July’s retail sales data. Economists currently forecast a rise of 0.4%, which may indicate renewed consumer strength.

Due to the US economy’s dependence on consumption, increased consumer spending may bring cheer to USD investors. However, it may in turn cheer the global markets, which could weigh on the safe-haven ‘Greenback’.

Tomorrow, the latest FOMC meeting minutes are scheduled for publication. Recently, the Federal Reserve has shifted to a more data-driven approach, with this consensus likely reflected in the minutes.

As such, their publication may weaken the US Dollar, as it could indicate falling support amongst the Fed for further tightening.

However, if the minutes firmly indicate room, and support, for future tightening, USD could strengthen.

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