GBP makes remarkable gains as UK inflation slows, but it's still 10.7%

FXOpen

It is quite fascinating how perceived good news tends to have a positive effect on the value of a sovereign currency.

The British Pound, which spent most of the tail end of this summer plummeting into the depths of obscurity against the surprisingly strong US dollar, at one point reaching as low as 1.18 which was its lowest point in over 40 years, has been rising dramatically in value.

Today, the Pound is up again, continuing its comeback which began taking place just two weeks ago and is now trading at 1.24 against the US Dollar.

Partly this has come about due to a slight weakening in the value of the US Dollar, which spent over a year holding its strength against all other major currencies despite the US economy suffering similarly high levels of inflation to Europe and the United Kingdom, at one point reaching 10.8% and being heralded as the highest inflation since the early 1970s.

Here's the unusual thing.

At the beginning of December, inflation in the United States began to rapidly decrease, and by two weeks ago stood at 7.7% which is still high, but a massive change for the better compared to the 10% it was at during the early summer of 2022.

Rather than surging even higher, the US Dollar actually decreased in value as US inflation lowered. Why would such a thing happen? Surely lower inflation, especially to that extent, would indicate a rapidly strengthening national economy? Yes, it does, however the need to do business with other nations whose inflation levels remain at over 10% meant that the US firms would have to pay more continually for services, products and wages for their subsidies in other regions as inflation in those regions continues to be high.

This would mean higher costs for US companies, so a conservative view was taken.

By the same bizarre token, the British Pound is on its way up as the US Dollar decreases, despite the British economy floundering and the inflation rate having gone up again today to a lofty 10.8%.

As the new year approaches, anticipation of interest rates reaching 5 to 6% is on the mind of many investors, and if that happens, it will create a huge increase in monthly payments on mortgages and unsecured borrowing for citizens of the United Kingdom, and may well slow consumer spending as priority bills and loan commitments take priority.

This inverse rationale with regard to currency value increases despite high inflation is an interesting dynamic and one to follow.

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