Pound US Dollar Exchange Rate Near 33-Month High on Stronger UK Inflation

GBP/EUR – Pound Benefits from UK Inflation Uptick

A surprise uptick in January’s UK inflation rate helped to boost demand for the Pound, unwinding some of its recent losses.

As inflation picked up to 0.7% on the year, the odds of any imminent Bank of England (BoE) monetary policy loosening appeared to diminish, to the benefit of GBP exchange rates.

With price pressures on the up, the case for BoE dovishness seems limited, even as the UK economy remains in a weakened state thanks to the ongoing national lockdown.

However, the mood towards the Pound could sour ahead of the weekend with forecasts pointing towards a sharp monthly decline in retail sales for January.

GBP/USD – Better-than-Expected UK GDP Bolsters Pound

After the fourth quarter UK GDP report showed better results than expected, the strength of GBP exchange rates increased last week.

As the quarterly growth rate clocked in at 1%, avoiding slipping into negative territory, this encouraged confidence in the underlying resilience of the economy.

Even so, as markets await fresh information on the government’s lockdown plans and the possibility of loosened social restrictions, the Pound may struggle to hold onto a positive footing.

If February’s services PMI remains trapped firmly in contraction territory on Friday, this could drive the Pound sharply lower across the board.

USD/GBP – US Dollar Limited by Consumer Sentiment Weakness

An unexpected decline in the Michigan consumer sentiment index left the US Dollar on a weaker footing against its rivals.

Underwhelming initial jobless claims figures also put a dampener on USD exchange rates, especially in the face of a general improvement in market risk appetite.

Any signs of dovishness on display in the Federal Reserve’s meeting minutes may also drag the US Dollar down, with investors still weighing up the odds of future policy action.

In the absence of any fresh signs of economic resilience, the mood towards the US Dollar could prove rather bearish in nature.

EUR/USD – Euro Vulnerable to Softening Services PMIs

Confirmation that the German inflation rate turned positive in January was not enough to keep the Euro from falling out of favour last week.

Another month of sharp slowdown in Eurozone construction and industrial output also put pressure on the single currency, highlighting the continued pressure coming to bear on the economy.

However, worries over the outlook of the currency union could ease if February’s Eurozone consumer confidence index shows signs of improvement.

On the other hand, another underwhelming performance from the latest set of services PMIs could see the Euro shedding fresh ground on fears of an imminent double-dip recession.

Louisa Heath

Contact Louisa Heath