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Pound hitting year high against USD could be positive for inflation

Journalist: John Choong (Head of Markets and Research), Newspage

ended 20. August 2024

Having recovered all of the ground it lost earlier this month, the Pound (GBP) is now at its strongest against the US Dollar (USD) at c.$1.30. This comes on the back of markets beginning to price in an all but “certain” rate cut by the US Federal Reserve next month, while the UK Monetary Policy Committee (MPC) is still expected to keep interest rates on hold.

Markets are currently pricing in a 100% chance of a Fed rate cut in September – 70% of a 25bps cut and 30% of a 50bps cut. Meanwhile, markets think that the MPC is likely to hold at its next meeting, with the odds of a rate cut in the UK slimming down to 35%.

With the all-important Jackson Hole symposium starting today, Fed Chair Jerome Powell is widely expected to drop further hints of a rate cut. However, traders will be paying close attention to his commentary on the labour market, as any signs of worry could force the USD lower. This follows comments made by Fed member Neil Kashkari and his worries surrounding a weakening labour force.

Meanwhile, current Vice President and Democrat nominee Kamala Harris said that she will push for a rise in corporation tax and impose food price control if she gets voted into the White House later this year. This has also played a factor in potentially stifling the USD as economic growth could take a hit as a result.

Nonetheless, with a stronger GBP, the effects of inflation coming back up could dampen. This would especially be the case on the commodity front, where most raw materials are traded in USD, and would ease the burden for many businesses dealing with high input costs.

Newspage asked experts for their views, below.

3 responses from the Newspage community

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Gabriel McKeown
Head of Macroeconomics at Sad Rabbit - Substack Newsletter
The USD's depreciation has been driven by the market’s anticipation of a Federal Reserve rate cut, following concerns of a decelerating US economy and labour market vulnerabilities. However, Vice President Kamala Harris's fiscal policy proposals, such as increasing corporation tax, could deter investment, further weakening the USD. This current combination of monetary and fiscal policy expectations has created continued downward pressure on the dollar.

Nonetheless, the strength of the GBP against the USD is intricately tied to the currently diverging monetary policies of the Bank of England and the Federal Reserve. While the BoE's decision to hold rates supports the GBP, its sustainability depends on upcoming UK economic data, including GDP growth rates and stable inflation levels. It's important to remain vigilant, as any shifts in market sentiment or central bank communications, particularly those that may arise from the Jackson Hole symposium, could alter this dynamic.
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Wes Wilkes
CEO at IronMarket Wealth
With an almost certain US rate cut coming in September and some volatile discussion about the level of cut, the pound has hit a 1-year high against the dollar, supported by some decent economic growth data coming out of the UK in recent days.

There is a case for this continuing given that the Bank of England may stick on pause for a little while longer to see how the inflation picture plays out, while the US are likely to enter a more frequent cutting cycle, even if at moderate 25 basis point intervals.

It will be interesting to see how the FTSE copes with this, however, as many of its constituent firms are exporters. Therefore, a strong pound could act as a commercial headwind for them.
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John Choong
Head of Equities and Markets at Interpretiv
As the Jackson Hole symposium looms, whispers of a dovish Powell are sinking the USD, as rumours of a potential 50bps cut are sending shockwaves through the forex market. The greenback's stumble is the pound's gain, however, pushing GBP/USD to a robust $1.30.

However, this forex tango isn't just about exchange rates; it's an inflation game-changer. With commodities such as oil priced in USD, a weakening dollar would mean that UK imports could get a welcome price break, potentially taming energy inflation.

The Bank of England's forecast that CPI will peak at 2.8% later this year might just be yesterday's news if this continues. So, as long as the Fed keeps its scissors sharper than the BoE's when it comes to rate cuts, GBP could keep its crown. In this monetary policy chess match, it seems the pound has found an unexpected ally in Powell's pivot.