GBP USD Exchange Rate Feels Weight of 40 Year High Inflation

The pound ran out of steam against the dollar on Wednesday having accelerated to within touching distance of the 1.25 benchmark the previous day.

The UK currency reversed most of the gains made on Tuesday – when it touched its highest level since 5 May – after the April consumer price index (CPI) reading showed inflation rising to the highest level in 40 years.

Consumer price inflation hit 9% last month, just below economists’ forecast of 9.1%. The red-hot print makes Britain’s inflation rate the highest of Europe’s five biggest economies.

Robust jobs market data on Tuesday stoked expectations that the Bank of England (BoE) would continue lifting interest rates, but the latest inflation numbers raised fears that a potential recession may restrict the pace of policy tightening.

Dollar edges higher as Fed’s Powell strikes hawkish tone

The dollar – which recorded its biggest single-day drop in more than two months the previous day – ticked higher on Wednesday following hawkish comments from Federal Reserve chief Jerome Powell.

Powell pledged that the central bank would ramp up interest rates as high as needed to nullify soaring inflation, which he believes is threatening the foundation of the economy.

Speaking at a Wall Street Journal event, Powell said: “What we need to see is inflation coming down in a clear and convincing way and we’re going to keep pushing until we see that,”

“If we don’t see that, we will have to consider moving more aggressively” to tighten monetary policy.

“Achieving price stability, restoring price stability, is an unconditional need. Something we have to do because really the economy doesn’t work for workers or for businesses or for anybody without price stability. It’s the bedrock of the economy really.”

The Fed has hiked rates by three-quarters of a percentage point this year and is poised to lift borrowing costs again in half-percentage-point increments at its June and July policy meetings. The scale and pace of central bank policy tightening will hinge on how the economy and inflation evolve.

Looking ahead

The next publication from the UK economy arrives overnight on Thursday when the Gfk consumer confidence print for April hits the headlines, which is forecast to deteriorate slightly from March. This is followed on Friday by retail sales figures and a speech by BoE rate-setter Huw Pill.

Fed official Patrick Harker is scheduled to make a speech on Wednesday evening, which could provide further clues about the US policy outlook.

Two notable data sets are slated for release in the US on Thursday: initial jobless claims for the week ended 13 May and the Philadelphia Fed manufacturing survey.

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