The article below looks at how a steady rise in inflation could be set to keep the Federal Reserve on track to raise interest rates through the second half of the year. The table below shows the movement in the GBPUSD exchange rate during the last month:

Currency Pair% ChangeDifference on £200,000

A steady rise of inflation is set to keep the Federal Reserve on track to raise interest rates through the second half of the year.

The Federal Reserve’s preferred measure of inflation ‘Personal Consumption Expenditure’ hit the Federal Reserve’s target of 2% for the first time in 6 years in May. The extremely efficient labor market and rising costs of raw materials have been to blame for the acceleration in inflation.

Manufacturers in the US are having to pay more for their materials as a result of the rising costs on lumber, aluminium and steel – as a result of the Trump administration.

So far, the rising costs have not been felt by the American people just yet, however economists have predicted that higher prices will force inflation to overshoot its target. This gives the Fed an even greater incentive to raise interest rates, with two scheduled for the second half of 2018 according to reports.

Growth figures out this week for both the U.K and U.S

Trade War and the US dollar

The threat of a trade war is becoming real as the European Commission cut its growth forecasts for this year, from 2.3% down to 2.1% annual growth.

South Korea also cut its growth forecasts yesterday and China hit out and America after it was announced that the Trump administration was planning on imposing $200BN in tariffs on Chinese goods coming into the US. The trade war in essence is only going to get worse and analysts are expecting the effects to be felt by the consumer.

The volatility in the markets at present are creating huge swings in the stock markets and causing riskier investments to be put on hold for now. Whilst the full effects are unknown, the trade war seems to be largely positive for the dollar.

Rising inflation cause will only lead to further rate hikes, strengthening the dollar and whilst volatility in the markets are high, investors are likely to hedge funds in the dollar to avoid major losses. With this in mind, I think its only matter of time before cable rates drop below 1.30 and stay there. It may be wise to think about organizing your trade sooner rather later.

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Exchange rates on this page are interbank rates and indicate where the market is trading to show the performance of a currency pair. They are not indicative of the rates which we offer. The information on this web site is provided free of charge for information purposes only. It does not constitute advice to any person on any matter. Foreign Currency Direct plc. ("FCD") makes every reasonable effort to ensure that this information is accurate and complete but assumes no responsibility for and gives no warranty with regard to the same.