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GBP/USD - Pound Struggles to Maintain Gains
17.06.2022

This week, markets have been preoccupied with the Federal Reserve who are pulling out all the big guns to stop inflation from getting out of hand. However, the Federal Reserve is not the only regulator to have had a jam-packed schedule this week.

The Bank of England has also released its Official Bank Rate which increased by 25 basis points as predicted. However, the UK’s Central Bank has come under increasing pressure as the UK looks to be the first country amongst the top 5 currencies to reach double-figure inflation.

So why is inflation so bad? Well, the issue with inflation is that it decreases your money’s purchasing power. In other words, if £100 bought your weekly shopping in 2021, you now are likely to need close to £110 for the same products. This is an issue for the economy and can damage consumer and investor confidence.

Yesterday, the GBP/USD pair increased in value by almost 1.40%, or 164 PIPs. However, the movement was not related to the increase in the BOE’s interest rate but due to the global decline of the US Dollar. This becomes clear when looking at the US Dollar Index which had declined yesterday. A disappointing labor market report also caused yesterday's downward dynamics of the US Dollar quotes: Initial Jobless Claims increased to 229,000 which is 15,000 more than predicted by analysts. However, the currency pair is also moving in favor of the US Dollar today as the pound is struggling to hold onto gains.

Dollar Attempts to Regain Losses.jpg

So why has Pound Sterling not increased in value along with the higher interest rates? This is one of the reasons why it's important to analyze both the price and market -developments. The theory is that a higher interest rate attracts foreign investment and consequently results in the currency appreciating. However, the US Federal Reserve is increasing interest rates at a much faster pace than the UK is, and the UK’s economic figures are stumbling. So far, this has resulted in investors maintaining their confidence in the US Dollar which is also known as the global safe-haven currency. Though traders should be cautious of volatility and a change in the scenario.

UK investors are now looking forward to next week when the UK will confirm the latest CPI figure. Currently, the level of inflation is at 9% which is the highest it's been in 40 years. It is predicted that the inflation rate will increase to 9.1% or 9.2%, however, this cannot be guaranteed until the rate is confirmed. The new inflation rate is also likely to affect how the BOE will plan the coming months. The new inflation rate is likely to have a strong influence on the exchange rate.

Lastly, the market is waiting for this evening's speech by US Fed Chairmen Jerome Powell with a report on the bank’s monetary policy. Although the Central Bank officially announced its plans during their last meeting, experts hope to hear the official's opinion on the fight against inflation and especially rising fuel prices.

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