The Pound has dipped versus the US Dollar snapping two straight sessions of gains.
The Pound US Dollar exchange rate settled on Tuesday +0.5% at US$1.2253, after attempting to push through US$1.23 earlier in the session.
At 07:00 UTC, GBP/USD is trading -0.1% at US$1.2240 after UK inflation moved sub 1% and as vaccine disappointment boosts demand for the safe haven US Dollar.
GBP: Inflation Expected Below 1%
The month of lockdown saw demand for goods evaporate and prices drop, additionally oil prices tumbled. As a result, inflation tumbled below 1% in April to just 0.8%. This is considerably below the central bank’s 2% target.
The Bank of England will have been watching the data carefully ahead of the June monetary policy meeting. Andrew Bailey, the Governor of the BoE, has already left the door wide open for expanding the bank’s bond buying scheme. Broad expectations are for the BoE to add buy up an additional £100 billion worth of bonds. This comes on top of the £200 billion announced in March. Yet with further bond buying already priced in, attention is turning quickly to negative interest rates.
A sharp drop in inflation could prompt speculation that the BoE will consider negative interest rates at its meeting next month. The prospect of negative rates is weighing on demand for the Pound.
USD: Vaccine Doubts Boost Safe Haven Flows
The US Dollar is advancing in early trade on Wednesday after a report cast doubt on a potential covid-19 vaccine. The medical news website STAT released a report questioning Moderna’s vaccine announcement at the start of the week, saying it had provided insufficient data to determine the vaccines efficacy.
With hopes of a cure dashed, at least for now, investors are once again turning towards the US Dollar for its safe haven status.
Adding to the downbeat tone in the market the Congressional Budget Office said that it expects the US economy to contract by an eye watering -38% in the second quarter. Unemployment is expected to push above 15% in September and remain above 11% for the rest of the year.
This forecast comes after Treasury Secretary Steve Mnuchin told the Senate banking committee, on Tuesday, that the coronavirus lockdown has driven unemployment to levels not seen in 90 years.
