The pound climbed above the 1.22 benchmark against the dollar on Friday for the first time since the end of June as a risk-on mood in markets continued to drive riskier currencies.
It’s been a data-light week in the UK, so Friday’s consumer credit print for June attracted added investor attention.
Consumer lending increased in Britain last month at its fastest rate in over three years in the face of the cost-of-living crisis. Meanwhile, the number of mortgage approvals dropped to the lowest level in two years.
Annual consumer credit growth jumped to 6.5% in June from 5.8% the previous month – its highest since May 2019, Friday’s print showed. Last month, a £1.781 billion increase in unsecured lending stimulated credit growth.
The Bank of England (BoE) data further signifies that runaway inflation is damaging the UK economy ahead of the central bank’s interest rate decision next week. This raised investor bets on aggressive BoE action to control prices, lending the pound additional support on Friday.
Typically, faster credit growth signals a robust economy – but this is not the case. Coupled with economic indicators pointing to the weakest consumer confidence in almost 50 years, consumers struggle to cope with surging inflation.
Dollar rebounds on inflation data
The risk-on mood in markets, recession fears, and dovish signals from the Federal Reserve weighed on the dollar on Friday before inflation data gave it a shot in the arm – pulling GBP USD down into the 1.20 range.
A data set that Fed policymakers use as their primary gauge of inflation leapt to its highest 12-month gain in over 40 years in June, the Bureau of Economic Analysis reported Friday.
The personal consumption expenditures (PCE) price index increased 6.8%, the most significant move over 12 months since January 1982. Excluding food and energy, the core PCE rose 4.8% from a year ago.
News that inflation continued to skyrocket in June keeps the Fed – which on Wednesday said it would not flinch in its battle against soaring prices – on track to hike interest rates as aggressively as deemed necessary, boosting the dollar.
On Wednesday, after the Fed’s two-day policy meeting had concluded, Fed Chair Jerome Powell acknowledged that policymakers must consider both types of inflation in the current climate.
“Core inflation is a better predictor of inflation going forward, headline inflation tends to be volatile. So, in ordinary times, you look through volatile moves in commodities,” he said.
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