Pound US Dollar (GBP/USD) Exchange Rate Rebounds on Mixed US Data

(Updated 17:00, 28/01/2022) The Pound US Dollar (GBP/USD) exchange rate rebounded from this morning’s low point as US data printed mixed today amidst a risk-off trading environment.

The Personal Consumption Expenditure (PCE) price index missed headline expectations, although core data exceeded forecasts by 0.1% – confirming the rising costs of goods and services and supporting a hawkish policy tightening outlook.

On the other hand, wage growth stalled in the final quarter of 2021, falling below expectations of a 1.7% increase. If salaries can’t keep pace with rising living costs, inflation in the US is likely to become a bigger problem.

Adding to USD downside, consumer sentiment dimmed in January on Covid-related headwinds.

Although risk-off pressures remain, including geopolitical tensions between Russia and Ukraine, the US Dollar is currently unable to attract support on the basis of its safe-haven status. Furthermore, the ‘Greenback’ may continue to trend down as economists worry over whether anticipated rate hikes in 2022 may be too much, too soon.

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GBP/USD Exchange Rate Resumes Downtrend on Lack of UK Data

The Pound US Dollar (GBP/USD) exchange rate has dipped this morning as the US Dollar (USD) retains its strength ahead of key US inflation data. Meanwhile, the Pound (GBP) is subdued on a lack of domestic data.

At the time of writing, GBP/USD is trading at $1.3375, virtually unchanged from today’s opening levels.

US Dollar (USD) Consolidates Gains Ahead of PCE Data

The US Dollar is climbing against the majority of its peers today despite an improving market mood, as investors are optimistic ahead of this afternoon’s Personal Consumption Expenditures (PCE) data release.

The PCE Price Index is the Federal Reserve’s preferred gauge of inflation and is expected to have increased to 5.9% in December 2021, supporting proposed monetary policy tightening measures.

Investors have been pricing aggressive policy tightening since US headline inflation increased at the fastest pace since 1981: yesterday’s GDP release encouraged traders further, indicating that the US economy is strong enough to handle higher interest.

According to Reuters:

‘Last year’s robust growth reported by the Commerce Department on Thursday supports the Federal Reserve’s pivot towards raising interest rates in March.’

Nevertheless, several economists advise caution. Christopher Rupkey, chief economist at FWDBONDS in New York, says:

‘Fed policymakers will have to be extremely careful at threading the needle when they raise interest rates as every other Federal Reserve in history has raised interest rates too high and brought the economy crashing back down.’

Pound (GBP) Subdued Amidst Political Turmoil

The Pound is trending down against the ‘Greenback’ this morning, while managing to extend small gains against several peers due to improving risk appetite.

Sterling sentiment is dented by a lack of domestic data – external factors have been driving GBP trading recently amidst investigations into the ‘Partygate’ scandal and an increasingly strained relationship between the UK and Europe.

Growing demands for Prime Minister Boris Johnson to resign exert pressure upon the Pound as uncertainty over the Tories’ leadership position threatens political instability. Approximately two thirds of British adults think Johnson ought to go.

Meanwhile, tensions persist between the UK and EU as foreign secretary Liz Truss tackles the Northern Ireland Protocol. Boris Johnson accused the EU on Wednesday of implementing the protocol in ‘an insane and pettifogging’ way, to which an EU diplomat responded:

‘We don’t understand where these comments are coming from when we’ve been very generous with our offers on the protocol.’

Various parties are becoming frustrated with the time it’s taking to find a solution that pleases everyone: the Democratic Unionist Party (DUP) have given Truss a deadline of 21 February to agree on an outcome with the European Union.

GBP/USD Exchange Rate Forecast: US Data in the Spotlight

The Pound US Dollar exchange rate is likely to trade on US economic stimuli this afternoon, as the country releases its PCE index and finalised consumer sentiment report. Morale is expected to have decreased in January, although climbing inflation will likely override any resulting headwinds.

External factors could also have some influence on GBP/USD dynamics, with any hint at the findings of the ‘Partygate’ report likely to stir up unease. Pound investors wait for political developments to unfold before placing bullish bets.

Olivia Evershed

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