Pound US Dollar Extends Climb to 34-Month High

A surprise weakening in the Michigan consumer sentiment index helped to push the Pound to US Dollar exchange rate higher once again, extending its 34-month high.

Last Week: Pound Shakes off UK GDP Contraction

Although the fourth quarter UK gross domestic product showed a sharp contraction on the year this was not enough to weigh down the GBP/USD exchange rate ahead of the weekend.

As the decline proved more limited than forecast this encouraged the Pound to push higher against many of the majors, especially as the quarterly growth rate remained in positive territory.

Optimism over the ongoing UK rollout of Covid-19 vaccines also encouraged GBP exchange rates to hold onto a stronger footing.

With the US economy showing fresh signs of weakness, thanks to a dip in consumer confidence and a miss from January’s inflation rate, the appeal of the US Dollar proved limited.

Three Things to Watch out for This Week

  1. UK Inflation Rate

Support for the Pound may weaken on Wednesday, however, with the release of January’s UK inflation data.

As forecasts point towards the headline inflation rate dipping from 0.6% to 0.5% on the year this could put GBP exchange rates under renewed pressure, putting an end to their bullish run.

2. US Retail Sales

Confidence in the health of the US economy could improve, meanwhile, if January’s retail sales data grows as anticipated.

A 1% uptick on the month, reversing much of December’s -0.7% contraction, would give investors some cause for optimism, suggesting a degree of improvement in domestic sentiment at the start of the year.

3. Federal Open Market Committee Meeting Minutes

However, greater volatility is likely in store for USD exchange rates with the release of the Federal Reserve’s most recent set of meeting minutes.

Any indication of increased dovishness among policymakers could drag heavily on demand for the US Dollar as markets brace against the potential for future monetary policy action.

GBP/USD Outlook

The Pound to US Dollar exchange rate may struggle to hold onto its highs over the course of the week, unless the latest Fed minutes give investors fresh cause for bearishness.

Louisa Heath

Contact Louisa Heath