GBP USD Exchange Rate Recovers from Lowest Level Since March 2020

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

The pound briefly dipped below 1.20 against the dollar on Wednesday – its lowest level since March 2020 – before trimming its losses by bouncing just above 1.21.

The move higher could be short-lived, however, amid slowing UK economic growth and a potential trade dispute with the European Union.

Britain’s gloomy growth prospects aren’t the only economic headwinds facing the pound. Uncertainty surrounding the pace of policy tightening by the Bank of England (BoE) – which is expected to hike interest rates for a fifth consecutive meeting on Thursday – to tackle inflation is also casting a shadow over the UK currency.

The political landscape looks equally uncertain for the pound. The British government’s plans to override post-Brexit trade rules for Northern Ireland have prompted the European Commission to launch fresh legal proceedings against Westminster and resume another challenge that was paused.

Upcoming Fed rate decision drives dollar sentiment

The dollar extended its rally on Wednesday in the run-up to the Federal Reserve’s policy announcement later in the day.

The US currency’s gains in recent months have been largely fuelled by the Fed lifting rates ahead of most other major central banks – and at a faster pace than the BoE. More recently it has been given a shot in the arm as investors seek safe havens to mitigate the economic impact of rapidly tightening financial conditions.

Americans tightened their purse strings in May, causing retail sales to fall for the first time in five months amid sky-high inflation, inflated gasoline prices and rising interest rates.

Retail sales – a measure of the total receipts of retail stores – dropped to a seasonally adjusted 0.3% in May from June, down from April’s revised 0.7% increase, the Commerce Department reported on Wednesday.

The reduction in consumer spending underscores the need to tame US inflation – which hit a fresh 40-year high last month – just hours before the Fed is poised to trigger another aggressive rate hike.

Looking ahead

Money markets are pricing in an 87% chance of a 75 basis point interest rate hike later on Wednesday as Fed rate-setters attempt to stamp out rampant inflation. However, with the sharpest rise in US interest rates in almost 30 years practically nailed on, the dollar may struggle to advance after the central bank’s decision.

The BoE is gearing up to raise interest rates to 1.25% when the Monetary Policy Committee meets on Thursday – UK rates haven’t breached 1% since 2009.

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