Having marched progressively higher on the back of softening interest rate speculation, vaccination hopes, and dollar weakness on Tuesday, the pound to dollar rate flirted with the 1.37 barrier yesterday. The elusive benchmark once again played hard to get, but the pair did manage to kiss its highest level since mid-2018 – over two and a half years ago.
The pound had felt the weight of mounting speculation that the Bank of England (BoE) is on the verge of introducing negative interest rates in the wake of the latest lockdown restrictions. However, BoE governor, Andrew Bailey surprised markets on Tuesday when he demonstrated his reluctance to take rates below zero: “In simple economics and maths terms, there is nothing to stop it at all,” he said “However, there are a lot of issues with it” – his comments sending the pound vs dollar rate on an upwards trajectory.
US Inflation Remains Tame
The dollar was crossing its fingers for some upbeat data yesterday to reverse Tuesday’s losses. The Labor Department revealed that US consumer prices rose solidly last month, fuelled by a surge in the cost of gasoline – its consumer price index (CPI) increased 0.4% in December after gaining 0.2% in November. In the 12 months to December, the CPI rose by 1.4% after increasing 1.2% in November.
However, underlying inflation remains subdued as the economy continues to wrestle with the COVID-19 pandemic, leaving the services sector – which accounts for more than two-thirds of the US economy – battered and bruised. The Federal Reserve uses its core personal consumption expenditures price index to track its 2% inflation target – the latest reading is at 1.4%.
Economists are divided on the outlook for inflation in the US this year. Some believe several factors will combine to give it the momentum needed to breach its target: the additional pandemic relief approved by the government in late December and expectations for more fiscal stimulus from President-elect Joe Biden. Whereas others expect price pressures to remain tame, arguing that soaring unemployment rates will make it difficult for manufacturers to pass on increased production costs to consumers.
Three speeches – including the latest updates from Federal Reserve Chairman Jerome Powell and his colleague Robert Kaplan – could impact dollar sentiment today, but it’s Joe Biden’s word’s that will be most eagerly anticipated. The President-elect is expected to unveil his long-awaited stimulus and relief package to address the continuing economic fallout from the Covid-19 pandemic – a move that is likely to cause the dollar to tumble.
Do you have a currency exchange coming up involving GBP and USD? Get in touch to discuss how these factors will continue to impact exchange rates in the coming weeks.