The Pound Sterling to US Dollar exchange rate (GBP/USD) is currently trading close to 1.7070, over a cent lower than the 5.5-year high of 1.7192 that Sterling reached last Tuesday.
Geopolitical concerns, related to the crises in Palestine and Ukraine, are currently stoking risk aversion trends and therefore boosting the appeal of the safe haven US Dollar.
The Pound is at risk of depreciating further against the US Dollar during today’s session if the latest US CPI inflation figure prints at 2.1%, as expected.
The Federal Reserve targets a consumer price index of 2.0% meaning that a score above that level would likely cause some investors to up their rate hike bets.
However, Fed Chairwoman Janet Yellen has repeatedly stated that she intends to maintain ultra-loose interest rates for the foreseeable future. Yellen often cites weak inflation and high unemployment as reasons to stick to the path of loose monetary policy.
If you are wondering how a CPI rate of 2.1%, higher than the Fed’s 2.0% target, can be considered ‘weak’ then there is a simple explanation: the Fed prefers the personal consumption expenditure price index (PCE) to the consumer price index (CPI) as a measure of inflationary pressures.
Whilst the CPI is currently running at 2.1% the PCE index is running considerably lower at 1.5%.
This means that the Pound to US Dollar exchange rate is unlikely to suffer a protracted period of weakness in reaction to this afternoon’s CPI report. It is likely that GBP/USD will depreciate if the CPI figure matches economists’ forecasts but important data later on in the week could support the Pound.
Wednesday’s Bank of England minutes report has the potential to give Sterling a massive boost if it shows that any of the nine-person Monetary Policy Committee (MPC) voted to raise interest rates in July.
Friday’s UK second quarter GDP report also carries the potential to bolster demand for the Pound if economic growth is seen to have accelerated during Q2. The median market forecast suggests that gross domestic product expanded by 0.8% between April and June, the same amount that the economy grew by in the first quarter of the year. Sterling bulls will be looking for anything north of 0.8% to drive GBP/USD higher.
A fresh 5.5-year high above psychological resistance at 1.7200 is a possibility if British economic reports impress. But Sterling could find itself sliding back towards 1.7000 if domestic data disappoints and US inflationary pressures start to influence Fed rate hike bets.
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