Pound US Dollar Exchange Rate Plummets

The Pound US Dollar (GBP/USD) exchange rate slumped on Wednesday as UK inflation hit a 40-year high and Liz Truss’s PMQ session failed to cheer investors.

At the time of writing, GBP/USD was trading at around $1.1222, which was roughly down 0.8% from Wednesday’s opening rate.

Pound (GBP) Exchange Rates Plummet amid Bleak Political and Economic Outlook

The Pound (GBP) struggled to find any support on Wednesday as GBP investors were cautious in response to the latest inflation figures.

Headline inflation rose to 10.1%, beating forecasts of 10%. Core inflation also outpaces expectations of 6.4% and rose marginally higher to 6.5%. GBP investors were left to worry about the impact this would have on the cost-of-living-crisis.

Modupe Adegbembo, G7 Economist at AXA Investment Managers, predicts UK inflation will rise to a new, double-digit 40-year high:

‘Inflation is set to jump higher in October’s print on the rise in energy prices this month to around 11% – likely a near term peak.’

For a while, GBP losses were limited as the uptick in inflation also stoked expectations for an aggressive interest rate hike from the Bank of England (BoE) at their next policy meeting.

Sterling also remained suppressed amid ongoing UK political uncertainty, amid signs Conservative MPs continue to plot against Liz Truss.

US Dollar (USD) Exchange Rates Enjoy Rapid Gains amid Risk-Off Mood

The US Dollar (USD) was up against the majority of its peers on Wednesday as investors became risk averse amid hawkish comments from the Federal Reserve.

The Fed is expected to make its fourth consecutive 75bps interest rate hike at their next policy meeting which Minneapolis Fed President Neel Kashkari reinforced on Tuesday:

‘If we don’t see progress in underlying inflation or core inflation, I don’t see why I would advocate stopping at 4.5%, or 4.75% or something like that. We need to see actual progress in core inflation and services inflation and we are not seeing it yet.’

However, USD’s upside was capped as concern grew over the long-term negative effects of higher interest rates.

David Dayen, writer for The American Prospect said that the dam is breaking, and that people are beginning to question the Fed’s aggressive monetary tightening.

GBP/USD Exchange Rate Forecast: UK Political Unrest to Move GBP?

Looking ahead, the Pound US Dollar exchange rate could be affected by further political uncertainty within the UK.

As Truss’s leadership continues to be questioned by the public, the opposition and even his own party, the Pound will likely remain volatile. A potential vote of no confidence in the prime minister could lead Sterling to plunge against his peers.

Looking ahead to Friday, UK retail figures for September may hinder the currency further, if figures print worse-than-expected again.

Turning to the US, a speech from Fed policymaker James Bullard could cause further tailwinds for the safe haven ‘Greenback’ if he favors hawkish rhetoric. If, however, his tone indicates a more restrictive move USD could be dented.