Pound to Dollar Rate Sinks Following Fed Meeting

Pound to Dollar Rate Extends Gains on Mixed US Data

The pound sprung higher yesterday morning after UK inflation exceeded forecasts, edging above the Bank of England’s (BoE) 2% target for the first time in almost two years. In doing so it put pressure on the central bank to act on interest rates.

Data released by the Office for National Statistics revealed inflation surged to 2.1% in May from 1.3% in April, surpassing economists’ forecasts of 1.8%. The Consumer Price Index reading will force BoE governor Andrew Bailey to write a letter to the chancellor of the exchequer explaining why price rises have breached the central bank’s target. Growing inflation also puts pressure on the BoE to hike the cost of borrowing to control price rises before they become unmanageable.

The Retail Price Index – a separate gauge of inflation – rose to 3.3% from 2.9% in April; while UK producer prices also leapt as inflationary pressures build, with manufacturers raising their prices by 4.6% year-on-year in May 2020, up from 4% in April, according to the latest producer price index, which tracks prices at the factory gate.

Fed brings interest rate hike projections forward

US Housing Starts – an indicator that tracks how many new single-family homes or buildings were constructed – rose 3.6% to a seasonally adjusted annual rate of 1.572 million units in May, the Commerce Department said yesterday, but missed economists’ expectations of a rise to 1.63 million. Permits for future homebuilding dropped 3.0% to a rate of 1.681 million units in May.

Demand for large, more expensive homes has been stoked by enforced homeworking amid the pandemic, fuelling a housing market boom. However, supply is restricted, with the inventory of previously owned homes near record lows.

The impact of the construction data on the dollar was muted, with all roads leading to the outcome of the latest meeting of the Federal Open Market Committee, which ended yesterday. The dollar climbed to a near six-week high yesterday after the Federal Reserve’s monetary policymakers reduced projections for the first post-pandemic interest rate hikes into 2023, highlighting an improved health situation and moving away from previous claims that the pandemic was weighing on the economy.

By this morning, the pound vs dollar rate had sunk to 1.39 for the first time since early May.

Looking ahead

The next data from the UK economy is scheduled for release tomorrow: Retail Sales and Consumer Inflation Expectations.

Two influential data sets are scheduled for release from the US economy today: Philadelphia Fed Manufacturing Survey for June and Initial Jobless Claims for the week ended 11 June.