News that UK inflation was rising even higher saw the British Pound rise even higher against the US Dollar, rising from around 1.55 to 1.57 following the surprising announcement that UK inflation had reached 0.1%.
Most experts and analysts had predicted inflation rates to be 0%, but according to the Office for National Statistics, a smaller reduction in clothing prices compared to the year before primarily led to the unexpected rate, and according to many Forex traders, the Pound could rise further if the Bank of England raise interest rates in order to regulate growth.
Although there are many economic and political, as well as trading, factors that determine the movement of currency exchange rates, inflation is an important one. Other factors need to be taken into consideration when using inflation as a possible guide to exchange rate movement, however, and in this case, it is the expectation or possibility of rising interest rates that has caused some of the increase.
Experts have warned that wages are rising and that this could ultimately lead to rates dropping once again, but much will depend on the stance of the Bank of England. Currently, it is widely agreed that they are wary of higher prices and may look to raise interest rates to help stimulate economic growth. Higher interest rates means that the UK economy will be more appealing to overseas investors, and more foreign currency will be used to buy the Pound. Ultimately, this leads to an increase in the GBP exchange rate.
Against the Dollar, Sterling hit a low of 1.464 in April before climbing to a high 1.587 in June. Although the current rate of 1.568 still has some way to go before it is back to that June rate, some investors have said that interest rate rises could push the figure up beyond 1.6.
Many people trading currency through services like FxPro Financial Services Limited trade on sentiment and prediction. Rising inflation like this, for example, has been taken as a sign that interest rates will be increased, which would likely lead to increased Sterling prices. Until further data is released to support or rebuke that sentiment, or until another economic factor takes the figures in a different direction, it is sentiment that drives the increases and decreases. Inflation rates are released regularly, although they are only nominal, and they provide a reasonably reliable measure of current and near-future economic growth. This means that they are considered to be advantageous to the trader.
There are many factors that can drive exchange rates, and looking solely at inflation is likely to lead a trader down a dark alley. It fails to take into account the performance of other currencies and other markets, which is important, while more powerful economic and even political drivers could have a greater influence on trends.