The pound’s rally ran out of steam against a strengthening dollar on Friday amid a concerning macroeconomic backdrop, causing the GBP USD pair to slip back below 1.20 on Friday morning
The UK currency took a shot in the arm Thursday after the report that British Prime Minister Boris Johnson tendered his resignation as political chaos swept through Westminster.
The political machinations in the Conservative Party – after a series of ministers resigned, forcing Johnson to quit – briefly papered over the cracks in the UK economy, blighted by rising household costs and slowing growth.
Bank of England (BoE) chief economist Huw Pill said on Thursday that he would consider voting for a faster pace of rate rises to tackle “uncomfortably high” inflation, but only if price pressures show signs of becoming entrenched.
Last month, the central bank’s Monetary Policy Committee said it was ready to “if necessary act forcefully” to control inflation.
In a speech at Sheffield Hallam University, Pill said: “At least on my part, this statement reflects a willingness – should circumstances require – to adopt a faster pace of tightening than we have seen implemented in this interest rate cycle so far”.
Dollar strengthens on robust employment data
The dollar strengthened on Friday following a stronger than expected jobs print that fuelled expectations of further aggressive interest rate hikes from the Federal Reserve.
The non-farm payrolls report showed US employers hired 372,000 new workers in June, compared with economists’ forecasts of 265,000. The unemployment rate was at 3.6%, while average earnings increased 5.1% annually.
Investors were eager for updates on the US jobs market’s inflationary trends in the report due to potential to shift rate hike expectations.
With US inflation soaring to 40-year highs, the Fed lifted borrowing costs by a whopping 0.75 percentage points in June. It signalled it may do so again at its next policy meeting.
The domestic economy expects to shrug off aggressive Fed policy tightening and continue expanding this year, St. Louis Fed President James Bullard commented on Thursday.
“At this point, it appears that the GDI measure is more consistent with observed labour markets, suggesting the economy continues to grow,”
In contrasting comments, another senior central bank official warned that failure to rein in soaring inflation would damage the US economy. Speaking on Thursday at an event hosted by the National Association for Business Economics, Fed governor Christopher Waller said: “Inflation is a tax on economic activity and the higher that tax, the more it suppresses economic activity”. Waller advised that if inflation wasn’t controlled, it could put the country in a “really bad economic outcome down the road”.
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