The pound to US dollar exchange rate struggled to recover on Friday and hit multi-week lows due to market fears and Brexit concerns. The pound and euro weakened further after the release of the US inflation data, with the pound falling to a three-week low.

Stock markets tumbled after US inflation hit a 40-year high, while the dollar rose against major currencies, as traders expect the Fed to raise interest rates sharply in the months ahead to curb inflationary pressures.

The mixed market conditions and the risk-averse trading conditions have not helped the GBP/USD pair. Some traders were also cautious, as they expect the pound to go lower if concerns about the weakening economy persist. According to Reuters, a REC survey out on Friday showed that the labour market is also losing momentum with UK employers hiring staff at the slowest pace since early 2021.

Yesterday, the ECB rattled the markets after it said there will be a 25-basis points rate hike in July but did not manage to convince markets that they will go for a 50 bps increase in September. The announcement pushed the single currency lower.  

Markets slide following US CPI

On Friday, both the euro and the pound fell after the release of the US inflation data. US inflation hit a four-decade high of 8.6% in the year to May, rising faster than earnings, and with the average American suffering a real wage cut.

The war in Ukraine and the Covid lockdowns in China have added more pressure on the rate of inflation and experts expect further higher readings.

The Fed will have the difficult task to ensure that inflation expectations don’t become ingrained, but they will also continue tightening policy while the economy is slowing. This jump in US inflation confirms that the Fed will continue its rate hikes until inflation finally starts to fade, even if the economy is struggling.

 UK inflation expectations have risen

Bank of England’s quarterly survey has found that the public’s expectations for the rate of inflation in a year’s time have increased with inflation in 12 months expected to be 4.6%, higher than February’s 4.3%. People expect prices to continue to rise for the next years, with expectations for two- and five years’ time rising to 3.4% and 3.5%, which are the highest since 2013 and 2019 respectively.

Brexit

Traders remain sceptical about the UK’s economic condition due to Brexit, Covid and the Russia-Ukraine conflict. PM Johnson’s willingness to unilaterally repeal the Brexit deal is also a concern for the pound as the European Union has warned that it will retaliate by imposing harsh sanctions on the UK and cut trade ties.

More generally, rising concerns over higher and faster rate hikes and their impact on growth as well as the war in Ukraine will continue to influence the markets and the pound to US dollar currency pair, in particular.

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