GBP USD Exchange Rate Pulls Back as UK Inflation Hits Fresh 40-Year High 

GBP USD Exchange Rate Pulls Back as UK Inflation Hits Fresh 40-Year High 

The pound briefly retreated into the 1.21 range against the dollar on Wednesday as the mercury continued rising during the UK economy’s latest temperature check. Figures published by the Office for National Statistics showed UK consumer inflation heated up to a new 40-year high in May, stoking fears of an economic slowdown.  

British consumer price inflation hit 9.1% last month – up from 9% in April – amid soaring food prices, underscoring the depths of the nation’s cost-of-living crisis. The reading matched economists’ consensus, with worse expected to come. 

Last week, the Bank of England (BoE) said inflation was on course to touch 11% later this year, with soaring energy prices taking their toll. 

Money markets continued to fully price in a 25 basis point BoE rate hike in August, as the central bank strives to tame inflation without crippling the economy in the face of a potential recession. 

Powell tells Congress the Fed is determined to reduce inflation

The dollar edged higher on Wednesday ahead of Federal Reserve Chair Jerome Powell’s two-day testimony to Congress, with investors expecting hawkish comments about tackling decades-high inflation. 

Speaking on Tuesday, Federal Reserve Bank of Richmond President Thomas Barkin said the central bank should raise interest rates as fast as possible, provided it doesn’t damage the economy. 

“We are in a situation where inflation is high, it’s broad-based, it’s persistent, and rates are still well below normal…The spirit is, you want to get back to where you want to go as fast as you can without breaking anything,” Barkin said.  

Bloomberg covered the live-streamed event hosted by the National Association for Business Economics. 

When he eventually took to the stand, Powell told congressional lawmakers that the central bank is set on cooling inflation and has the tools in its arsenal to do so. 

“At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so,” Powell told the Senate Banking Committee. “We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.” 

Looking ahead

Jerome Powell concludes his two-day semi-annual monetary policy testimony to the Senate on Thursday. 

The S&P Global/CIPS services purchasing managers’ index (PMI) for June is released from the UK economy on Thursday. The UK’s powerhouse services industry is forecast to contract to 53 from 53.4 in May – a reading above 50 indicates expansion in the sector. 

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