The Pound to Dollar Exchange Rate Is Volatile
After the announcement of Friday’s GDP figures, the Pound to Dollar (GBP/USD) exchange rate was impacted by choppy trading, but it did not much improve and fell to lows of 1.2050. The losses were mostly caused by a stronger US currency and growing concerns that the Federal Reserve may need to raise interest rates more quickly, especially if inflation data is higher than anticipated.
Euro to Pound Exchange Rate Declines
The exchange rate between the pound and the euro (GBP/EUR), which had risen to 10-day highs at 1.1330, fell to little below 1.1300 on Monday. If the high inflation numbers cause a decline in the demand for risk globally, the effect of domestic reservations on the pound will be more severe.
The Brittle Pound Attitude Remains
Although the UK escaped a technical recession in Friday’s GDP figures, the overall data remained sluggish and indicated a stagnating economy, which provided some reprieve for the pound. OANDA strategist Craig Erlam said that the lack of growth over time and the high but dropping inflation are more concerns than the formal definition of recession. There is little opportunity for policy stimulus because of the government’s need to maintain budgetary management and its strict monetary policy.
Upcoming Budget Presentation and Inflation Data
On Wednesday, the most recent inflation statistics will be made public, and on March 15th, Chancellor Hunt is required to propose his spring budget. According to Rabobank, although Hunt’s promises to lower inflation and avoid any budget shocks may forestall a crisis in the gilt market, little is likely to change about the present economic climate. With a target level of 0.9000 in EUR/GBP in the second half of 2023, ING anticipates Euro support on falls and further Euro outperformance.
Expected UK Inflation Rate
Forecasts indicate that the UK’s headline inflation rate will go from 10.5% to 10.3%. Senior FX strategist at Barclays in Tokyo, Shinichiro Kadota, claimed that the market is more anxious about the possibility of greater inflation than reduced inflation. MUFG also mentioned the seasonal bias favoring the dollar at this time of the year and said that any disappointment in tomorrow’s inflation report might result in a big shift in rates and a further rise for the dollar.