Pound US Dollar (GBP/USD) Exchange Rate Tumbles on Risk Sentiment Reversal

Pound US Dollar Exchange Rate Sinks as US Dollar Regains Upside

(Updated 16:55, 14/01/2022) The Pound US Dollar (GBP/USD) exchange rate fell this afternoon as the US Dollar recouped some of its losses, rebounding from a 2-month low. Oversold conditions triggered demand for the currency, in spite of weak US retail data: sales contracted by 1.9% in December 2021 rather than remaining unchanged as expected.

US industrial production and consumer sentiment also missed forecasts, but failed to exert significant downward pressure. Referring to the former, analysts at Wells Fargo remarked that ‘manufacturing output is being held down by tangled supply lines like the many ropes of the Lilliputions that held down Gulliver.’

Meanwhile, the Michigan consumer sentiment for the US fell to 68.8 in January 2022, the second lowest level in a decade and below market forecasts of 70. According to the University of Michigan, this was mainly due to the spread of the Delta and Omicron coronavirus variants and escalating inflation.

Richard Curtin, the survey director, highlighted inflation as a more pertinent issue, according to respondents:

‘While the Delta and Omicron variants certainly contributed to this downward shift, the decline was also due to an escalating inflation rate… Three-quarters of consumers in early January ranked inflation, compared with unemployment, as the more serious problem facing the nation.’

Original article continues below:

GBP/USD Exchange Rate Remains near 2-Month High on GDP Tailwinds

The Pound US Dollar (GBP/USD) exchange rate is trading up this morning as UK GDP exceeded forecasts for the month of November. The US Dollar (USD) continues to face downside ahead of this afternoon’s retail data and consumer sentiment release.

At the time of writing, GBP/USD is trading at $1.3729, up slightly on today’s opening levels.

Pound (GBP) Bolstered by Higher-Than-Expected GDP

The Pound (GBP) is climbing against the majority of its peers this morning as the British economy was revealed to have expanded by 0.9% in November 2021. The consensus forecast was for a 0.4% rise in GDP.

According to the Office for National Statistics (ONS), GDP peaked above its pre-pandemic level for the first time, by 0.7% – supported by human health and social work activities, wholesale and retail trade, and arts, entertainment and recreation.

The increase in health services as a proportion of economic activity was another factor contributing towards the rise in GDP.

Suren Thiru, the head of economics at the British Chambers of Commerce, warned, however, that:

‘Stronger growth in November is likely to be followed by a modest fall in output in December and January, as consumer caution to socialise and spend, and mounting staff absences sparked by Omicron and plan B limit activity.

Surging inflation and persistent supply chain disruption may mean that the UK’s economic growth prospects remain under pressure for much of 2022.’

US Dollar (USD) Extends Downside as US Bond Yields Rebound

The US Dollar (USD) continues to trade down against its peers today, unable to shake off headwinds following Wednesday’s climb in inflation. US bond yields have rebounded, exerting additional downward pressure on the currency.

Core PPI data yesterday extended the theme of rising inflationary pressures, subduing USD trading. As the Federal Reserve has already committed to an aggressive monetary tightening policy, the news could do little to buoy sentiment.

Instead, investors worried that the ‘transitory’ inflation narrative no longer held true. Surging prices for used cars, rent, food and fuel contributed to rising consumer prices, prompting US President Joe Biden to admit that there was ‘more work to do.’

Polls show that the rise in living costs is even replacing the coronavirus as a public concern. According to the Organisation for Economic Cooperation and Development (OECD), inflation across its 38 member countries hit a 25-year high in November.

Pound US Dollar Exchange Rate Forecast: US Data to Affect Trading Ahead?

Looking ahead, a clutch of US data this afternoon is likely to influence the Pound US Dollar exchange rate.

US retail sales are expected to have remained unchanged in December 2021, while Michigan consumer sentiment is forecast to have declined. Both releases are likely to exert headwinds.

Meanwhile, Sterling may continue to trade up on GDP tailwinds – although the currency could come under pressure from forecasts that Omicron and the rising cost of living will hit growth.

Olivia Evershed

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