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CPI Inflation Data Damages Pound to US Dollar Exchange Rate (GBP/USD)

Pound to US Dollar exchange rate chart

The Pound to US Dollar exchange rate (GBP/USD) made a break above psychological resistance at 1.6700 yesterday in reaction to Bank of England Governor Mark Carney’s latest take on the outlook for UK interest rates.

The Governor told the Sunday Times over the weekend that interest rates could start to rise even if wage growth continues to be outpaced by inflation. The Sterling-positive remark appeared to contradict Carney’s remarks last Wednesday, which suggested that the BoE would wait until ‘real wages’ were growing in Britain before raising the benchmark borrowing rate.

Sterling shot up by around a third of a cent from 1.6690 to 1.6720 as soon as markets reopened for the new trading week in response to Carney’s latest comments.

Political Pressure?

Some commentators, and indeed some members of parliament, claim that the Governor’s characteristic shifts in sentiment are politically motivated. The argument centres around the belief that Chancellor George Osborne and Carney have agreed to keep interest rates low until after the general election in May next year. The bank has been quick to quash these rumours and assert its independence.

It has also been posited that Carney’s latest comments were designed to prepare markets for Wednesday’s BoE minutes report, which some analysts think will show that at least one member of the Monetary Policy Committee voted for a rate rise in August.

The very fact that accusations of political pressure have come to light is likely to bode well for the Pound. This is because the bank may feel the need to begin its hiking cycle sooner rather than later to prove that it is responding to economic events rather than to government officials.

CPI Inflation Data

However, today’s data calendar carries the potential to send Sterling lower in the short term.

British CPI inflation is predicted to have slid from 1.9% to 1.8% during July, which could have a negative impact on rate hike speculation. If the report disappoints then the impact could be even greater.

US CPI, on the other hand, is expected to print at 2.0% – bang in line with the Federal Reserve’s inflation target. This could easily stoke demand for the ‘Greenback’.

On the other hand a stronger-than-anticipated UK CPI figure and a weaker American inflation reading would likely boost GBP/USD.

CPI Inflation Data Weaker than Expected, Pound to US Dollar Softens (GBP/USD)

The Pound Sterling to US Dollar is currently trending in the region of 1.6616.

Yesterday’s domestic data didn’t make pretty reading for those invested in the Pound. The year-on-year Consumer Price Index was forecast to fall from 1.9% to 1.8%, which in itself would have had a short-term detrimental effect on Sterling. The actual data published showed an unexpected fall to 1.6%. Also the Retail Price Index posted a negative result; having been forecast to dip from 256.3 to 256.2, the actual data revealed the figure to have dropped to 256.0.

The pair of poor results pertaining to inflation data has made the prospect of a pre-2015 rate hike increasingly unlikely. Despite Bank of England (BoE) Governor Mark Carney’s assurances that he will not wait for wages to rise before hiking the interest rate, the detrimental figures are likely to hold back any hike until wages and inflation gain better correlation.

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