US Dollar (USD) Buoyed by US CPI Figures
The US Dollar is trending higher this afternoon as markets response to the latest US consumer price index (CPI).
According to data published by the US Bureau of Labor Statistics (BLS), headline inflation climbed from 2.1% to 2.3% in December, rising to its highest levels since October 2018.
However the monthly figures came in slightly below expectations, accelerating 0.2% against forecasts for a 0.3% rise.
The robust year-on-year figures will be welcomed by USD investors however as it places inflation firmly with the Federal Reserve’s target range of 2-3%, decreasingly the odds the Fed will need to follow up last year’s interest rate cuts with more easing in 2020.
Pound (GBP) Struggles amidst BoE Rate Cut Speculation
At the same time, the Pound (GBP) is struggling to find momentum today in light of rising expectations of an interest rate cut from the Bank of England (BoE) in the near future.
The odds for a January rate cut from the BoE currently sit at around 50%, up from just 5% just over a week ago.
This surge in rate cut speculation comes in the wake of the UK’s latest GDP figures and some dovish commentary from the BoE over the last week.
The Office for National Statistics (ONS) reported on Monday that monthly growth unexpectedly shrank by 0.3% in November.
This comes on the heels of comments from BoE Governor, Mark Carney in which he suggested the bank would ‘favour a relatively prompt response’ if weak growth persisted.
As a result some analysts are warning there is a significant chance of a rate cut from the bank this month.
Peter Dixon, economist at Commerzbank, suggests:
‘With a growing chorus on the MPC apparently open to the prospect of a rate cut, if the data points in that direction, Monday’s release might well tip the balance of one or two members ahead of the meeting on 30 January, where the market probability assigned to a 25 bps cut has risen to 50% versus 5% at the start of last week.’
However, not all analysts are convinced, with some arguing that the BoE will remain in wait and see mode for a little longer yet.
GBP/USD Exchange Rate Forecast: Weak Inflation to Stoke BoE Rate Cut Fears?
Looking ahead, the Pound US Dollar (GBP/USD) exchange rate may extend its losses through the mid-week with the publication of the UK’s consumer price index.
Economists forecast the CPI figures will reveal that UK inflation held steady at 1.5% in December, its lowest levels since November 2016.
With inflation holding well below the Bank of England’s target rate of 2% this is likely to increase speculation that the bank made need to act by cutting interest rates this month.
Meanwhile, in focus for USD investors on Wednesday will be the signing of a ‘phase one’ trade deal between the US and China.
The signing of the preliminary deal will mark a major de-escalation of tensions between the two powers and may bolster the appeal of the US Dollar on hopes an improved trade relationship will help to boost US growth in 2020.
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TAGS: American Dollar Forecasts