The Pound has advanced against the US Dollar today, with the GBP USD exchange rate achieving 1.2988 following Donald Trump’s shock dismissal of FBI Director James Comey.
Future Pound to US Dollar currency movement is likely to be caused by UK inflation forecasts.
The inflation rate is tied to the odds of a Bank of England (BoE) interest rate hike; higher inflation raises the chances that the BoE will respond with higher interest rates.
UK inflation posted 2.3% in April, just above the BoE target of 2%. Back in March, BoE policymaker Kristin Forbes voiced concerns about high inflation as a reason for hiking interest rates;
‘With inflation rising sharply, and only mixed evidence on slowing activity domestically, some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider a more immediate reduction in policy support’.
Problematically, Forbes’ opinion was not shared with colleagues, who voted 8-1 for another interest rate freeze.
Over the rest of 2017, UK inflation is forecast to rise even further above the BoE’s 2% target, as stated by National Institute of Economic and Social Research (NIESR) official Simon Kirby;
‘The rate of inflation is expected to rise from 2.3% per annum in March to almost 3.5% by the end of 2017. By 2018 we expect consumer spending growth to have effectively stalled’.
Despite inflation predicted to be 1.4% above the BoE’s target by the end of 2017, NIESR officials still don’t see the BoE touching interest rates until mid-2019.
If the UK central bank remains stubborn about interest rate hikes despite soaring inflation in 2017, the Pound could depreciate on each BoE interest rate freeze.
The latest cause of US Dollar losses, the surprise dismissal of the head of the FBI, may cause long-lasting damage to USD demand.
Even if Donald Trump’s almost unprecedented firing is a one-off, the event may have already hardened the House of Representative against him. Think Markets’ Naeem Aslam highlights the problems that Trump could now face;
‘For investors, this news matters, because President Trump needs to make alliance with both parties in order to have a swifter path for his tax reform bill to pass. Any unnecessary escalation of tensions doesn’t provide much aid to bolster investor sentiment. The last thing they want to see is the tax bill to drag its heels forever and [for] the nightmare of repealing Obamacare [to] return’.
If House and Senate leaders see Trump’s firing of Comey as unjustified, they may make things difficult when it comes to passing policy. Such a development could cause heavy US Dollar devaluation.
Recent Interbank GBP USD Exchange Rates
At the time of writing, the Pound to US Dollar (GBP USD) exchange rate was trading at 1.29 and the US Dollar to Pound (USD GBP) exchange rate was trading down at 0.77.
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