Pound v US dollar: GBP exchange rate drops sharply after UK inflation rate falls

THE pound to US dollar exchange rate has fallen by -0.8 per cent today. It follows the news that UK inflation has dropped to 2.5 per cent - their lowest level in a year.

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The pound to US dollar exchange rate has fallen by -0.8 per cent

Pound traders have responded negatively to the news, with Sterling dropping to an exchange rate of $1.418 against the US dollar.

This is a marked deterioration from Tuesday’s pairing high of $1.437, when UK economic data suggested that a May Bank of England (BoE) interest rate hike was likely.

Sentiment has now shifted in the opposite direction, with pound traders concerned that if inflation falls by too much then the BoE will hold off on adjusting interest rates.

Lower inflation reduces the pressure on the BoE to act, so policymakers may consider a ‘hands-off’ approach to see if the economy corrects itself without intervention.

On the other side of the pairing, the US dollar has advanced following remarks from Federal Reserve member Charles Evans.

Mr Evans, Fed President of the Bank of Chicago, has suggested that gradually and continuously raising US interest rates will likely be viable in 2018 and beyond.

Mr Evans downplayed the risks of inflation rising uncontrollably after the interest rate hikes.

He said: “I don’t foresee an outsized risk of a breakout in inflation.

I don’t foresee an outsized risk of a breakout in inflation

Charles Evans, Fed President of the Bank of Chicago

“As long as this picture continues, the (Fed) can increase rates gradually while monitoring any rising inflationary pressures.

“I think we have the opportunity to more patiently read and react to the incoming data.”

There is still one last UK data release that could strongly influence the pound to US dollar exchange rate this week - March’s retail sales stats, out tomorrow.

Current expectations are for the annual figures to show growth, but for the month-on-month readings to show slowing activity compared to February.

The pound might advance against the US dollar on such results, as annualised data is usually considered more important than monthly readings.

The Bank of England explains the exchange rate

Additionally, disappointing stats for March may be discounted as a one-off, given that most UK sectors were slowed by weather over the month.

Today’s US economic highlights will be speeches from Federal Reserve officials, coming over the afternoon and evening.

Fed Bank of New York President William Dudley will be speaking initially, followed by Fed Vice Chairman for Supervision Randal Quarles.

Mr Dudley has previously advocated three to four US interest rate hikes in 2018; if he reiterates this sentiment then the US dollar could advance against the pound.

Mr Quarles is seen as a more neutral policymaker, so if he commits to the same number of rate hikes this year then a USD/GBP rise could take place.

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