GBP USD Exchange Rate Nudges Higher on Rate Hike Expectations 

The pound ticked higher against a slightly weaker dollar, with the UK interest rate outlook back in the spotlight after a Bank of England (BoE) official indicated the need for a further hike. 

The central bank’s Deputy Governor Dave Ramsden said it was “more likely than not” that the BoE will have to lift borrowing costs from their current 14-year-high to tame inflation pressures that are becoming entrenched in the economy. 

The BoE voted in favour of pushing up interest rates by a large 50 basis points (bps) – the largest UK hike since 1995 – at last week’s policy meeting but warned of a looming recession this year. 

This gloomy economic outlook is being compounded by uncertainty emanating from the Conservative Party leadership race, with investors unsure what the new government’s fiscal plans will be.  

UK retail sales increased in July due to demand for summer clothing and picnic food during the hot weather. However, decades-high inflation is covering up a significantly larger drop in volumes, according to the British Retail Consortium (BRC). 

Sales rose by 2.3% last month, ending three consecutive months of decline. The figures are not adjusted for inflation, which the BRC said was red-hot amid the cost of living crisis that continues to hit UK households. 

Helen Dickinson, BRC’s chief executive, said: “with inflation at over 9% many retailers are still contending with falling sales volumes during what remains an incredibly difficult trading period,” 

Dollar pulls back slightly as US inflation slows

The dollar lacked impetus early this week as investors looked for further signs that another aggressive interest rate hike from the Federal Reserve would be delivered next month.  

Wednesday’s key figures showed that US inflation slowed more than anticipated. This was due to a drop in fuel prices, signalling that recent price surges may have passed their peak.   

The consumer price index stood at 8.5pc last month. This figure was down from June’s 9.1pc. A fall in fuel prices likely offset rises in food and accommodation. The weaker reading was driven by a fall in fuel prices, which offset a rise in food and accommodation costs. 

Additionally, core inflation increased 5.9pc, behind forecasts of 6.1pc. Still, recession fears loom as Americans grapple with a cost-of-living crisis, relying on credit cards and dipping into savings.  

Friday’s stronger-than-expected jobs report has already stoked bets on another hefty 75 bps hike by the US central bank. 

Worker productivity in the US dropped in the second quarter at its sharpest pace on an annual basis since 1948, the Labour Department reported on Tuesday. Meanwhile, growth in unit labour costs gathered pace, suggesting robust wage pressures will continue to help keep inflation sky-high. 

Nonfarm productivity – a measure of hourly output per worker – declined at a 2.5% pace from 12 months ago. It also fell steeply in the second quarter at a 4.6% annualised rate, having declined by an upwardly revised 7.4% in the first quarter, the report showed. 

Looking ahead

The market awaits the Gross Domestic Product (GDP) release by the Office of National Statistics on Friday. This will give an indication of the total value of goods and services produced by the UK. A rising trend in economic activity is generally seen as good for the GBP, while a falling trend is seen as bad. 

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