A reduction in inflation is a good thing, is it not?
Surely when a national economy previously blighted by what appeared to be runaway inflation suddenly gets back on track and the inflation figure falls dramatically, this would be the sign of strengthening and therefore have a positive effect on the national sovereign currency?
In the case of the United States economy and the United States Dollar, quite the opposite appears to be the case.
The US Dollar has spent the majority of this year demonstrating remarkable strength against a floundering British Pound and almost equally floundering Euro, despite all of North America, Britain and mainland Europe being subject to similar levels of surging inflation.
The US Dollar held firmer because of the greater productivity which took place in the US economy during the past 2 years compared to all-encompassing lockdowns in Europe and the United Kingdom = by contrast only parts of the United States were subject to lockdowns – and the United States’ overall return to productivity soon after that charade finished.
However, in terms of inflation levels, both continents on each side of the Atlantic had experienced almost double-digit inflation which was then countered by central bank intervention in the form of several interest rate rises.
Just last week, however, the United States inflation figure was recorded as having dropped to 7.7% whereas the United Kingdom’s is now around 11% and rising, with potential interest rate figures of a projected 5% looking likely by early 2023.
Despite this, however, the US Dollar has actually declined in value compared to the British Pound, and the Pound is now making some headway after a long period of depreciation. This morning, the GBPUSD pair is trading at 1.21, which is a substantial increase over the 1.18 of last week.
One theory is that investors may be looking at some early indications that US inflation may finally be easing, potentially paving the way for the Federal Reserve (US central bank) to reduce the speed at which it has been boosting borrowing costs, therefore indicating that consumers may start borrowing again and in a period of economic difficulty, that would add to the nation’s overall liabilities.
Conversely, many mortgage lenders in the United Kingdom have removed products from their range, making it much harder for people to get mortgages as the potential increase in interest rates which is predicted for next year is outside the risk management scope of retail mortgage lenders.
In short – they are worried that borrowers may not be able to afford the payments if the interest rate rises sharply.
Overall, keeping borrowing down is a prudent policy during times of economic difficulties.
Perhaps that is why the Pound suddenly struck back against the US Dollar. One thing’s for sure, it is not because of any sudden prowess in the British money market; that is still in the doldrums and blighted by cost of living crises and high inflation.
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