GBP/USD Jumps on Slowing US Q3 GDP
(Updated 16:55, 28/10/21) The Pound (GBP) gained sharply against the US Dollar (USD) on Thursday afternoon following the US third quarter GDP growth data release.
US growth unexpectedly slowed to 2% between July and September, missing forecast of 2.7% and a sharp drop on second quarter growth of 6.7%.
Against the backdrop of rising inflation, the slowdown in economic growth fuelled concerns over the US economic recovery.
Although US growth is widely expected to accelerate in the fourth quarter as the impact of the Delta variant of coronavirus wave subsides and US government spending plans begin to make a difference, the slowdown still caused market jitters and raised doubts over the Federal Reserve’s stance on monetary policy tightening.
Pound US Dollar (GBP/USD) Exchange Rate Stable after Budget Losses
The Pound US Dollar (GBP/USD) exchange rate is attempting to recover some of yesterday’s losses early in Thursday’s European session.
GBP/USD fell yesterday on UK Autumn Budget headlines but Sterling is up slightly this morning to trade at 1.3759.
Meanwhile, ahead of the US third quarter GDP growth rate data release, the US Dollar is struggling for direction.
Pound (GBP) Attempts Recovery Following Budget-Driven Losses
The Pound (GBP) is firm this morning after sliding yesterday following the UK Autumn Budget.
Investors were cautious as UK Chancellor Rishi Sunak announced spending and tax plans, while markets continue to analyse the details of the government’s economic plans.
The Office for Budget Responsibility’s (OBR) accompanying economic growth projections have caused some mixed movement in Sterling.
The independent public-funded body upwardly revised its growth forecasts to 6.5% this year, up from previous forecasts of 4% in March, followed by 6% in 2022.
At the same time, unemployment forecasts downgraded to 5.2% and borrowing as a percentage of GDP is expected to lower from 7.9% by the end of this year to 3.3% by the end of 2022.
While the revised growth forecasts seem to have supported Sterling, projections on the impact of Brexit may offset some of the optimism.
OBR forecasts remain the same as earlier in the year, indicating that leaving the EU would reduce UK GDP by 4% and trade between the UK and EU will be down 15%.
Richard Hughes the chairman of the Office for Budget Responsibility said:
“In the long term it is the case that Brexit has a bigger impact than the pandemic.
“We think that the effect of the pandemic will reduce that (GDP) output by a further 2%.”
Meanwhile, rising tensions between France and the UK on fishing rights as UK-EU talks continue on the Northern Ireland protocol are also appearing to limit GBP/USD today.
US Dollar (USD) Lacks Direction ahead of GDP
The US Dollar (USD) is subdued in early trading during Thursday’s European session, although may experience volatility later in the day on the US third quarter GDP growth release.
Forecasts point to growth slowing to 2.7% between July and September this year, from 6.7% in the second quarter.
The data may dent USD exchange rates on concerns that US economic growth is slowing, which may in turn influence the Federal Reserve’s stance on tightening monetary policy.
However, the Fed is widely expected to announce plans to begin tapering its bond-buying programme at its November policy meeting, with chair Jerome Powell reiterating the central bank’s stance earlier this week.
Powell said:
“I do think it’s time to taper; I don’t think it’s time to raise rates.
“We need to watch, and watch carefully, and see if the economy is evolving consistent with our expectations, and adapt policy accordingly.”
Meanwhile, a decline in September’s US durable goods orders by -0.4% yesterday, above the -1.1% forecast caused limited movement in USD ahead of GDP data today.
Pound US Dollar Forecast: GBP/USD Set for Volatility?
The Pound US Dollar exchange rate looks set for additional volatility going into the weekend.
In the absence of notable UK data releases, the Pound appears likely to remain sensitive to UK-EU talks, rising coronavirus cases, and reaction to the UK budget in the lead up to the Bank of England (BoE) interest rate decision next week.
Meanwhile, the US GDP data is in focus today before attention turns to US personal spending and income data tomorrow.
Forecasts for the PCE price index indicate inflation will have risen to 4.4% in September, up slightly on August’s 4.3% reading.
As the Federal Reserve’s preferred measure of inflation, the data could stoke volatility in USD if the figures surprise enough to potentially cause the Fed to alter its policy outlook.