GBP USD Exchange Rate Edges Higher as Dollar Softens 

Having jumped against a weakening dollar in afternoon trading on Wednesday, after data showed falling gas prices halted US inflation, the pound made marginal gains the following day. 

Developments in the Conservative Party leadership race and plans for organised blackouts in January were influencing sentiment towards the UK currency on Thursday. 

Reports that front-runner Liz Truss would give ministers powers to override financial watchdogs, such as the Bank of England (BoE), if she succeeds Boris Johnson as PM were rebuffed by the central bank’s Governor Andrew Bailey. He believes watering down the independence of regulators would erode post-Brexit reforms. 

“Regulatory independence is important, not least because our international standing, and therefore the competitiveness of the UK financial sector which the reforms are aimed at enhancing, depends on it,” Bailey said in a letter to parliament’s Treasury Select Committee. 

His comments were reinforced by BoE Chief Economist Huw Pill, who said that central banks can take robust decisions on monetary policy, unlike governments because they’re driven by short-term political goals. 

It’s been reported that authorities in Britain are preparing plans for organised blackouts for industry and households this winter when cold weather potentially coincides with gas shortages. 

Dollar extends inflation-fuelled slide

The dollar extended its slide on Thursday as investors pared bets on another aggressive interest rate hike at the Federal Reserve’s next policy meeting after a better-than-expected US inflation report the previous day. 

The sharper than expected slowdown in prices spurred hopes that the nation may have passed the peak of the worst inflationary pressures in four decades. Following the print, US President Joe Biden said: “We’re seeing some signs that inflation may be beginning to moderate.” 

Fed policymakers were quick to dampen expectations the Fed will slow the pace of interest rate hikes, with Neal Kashkari – the president of the Federal Reserve Bank of Minneapolis – saying on Wednesday that the central bank was “far, far away from declaring victory” on inflation. 

Wholesale inflation dropped last month for the first time in two years amid a plunge in energy prices, in another sign that price increases are easing.  

The producer price index – a gauge of prices received for final demand products – fell 0.5% from June, the first decline since April 2020, a month after the Covid-19 pandemic began ravaging the economy. Economists had forecast a 0.2% increase. 

Looking ahead

UK gross domestic product (GDP) data released on Friday is expected to show more signs of a slowing domestic economy. The consensus is for GDP to have dipped 0.3% in the second quarter from a 0.4% growth in the first quarter. 

The Michigan consumer sentiment index for August is slated for release in the US on Friday. 

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