Pound US Dollar (GBP/USD) Exchange Rate Rangebound as UK Growth Outlook Offsets 2021’s 7.5% GDP Increase
The Pound US Dollar (GBP/USD) exchange rate is trading in a narrow range this morning following the release of UK GDP data.
While the UK economy grew by 7.5% in 2021, data for the fourth quarter and December indicated a more mixed performance that fuelled concerns over the UK’s growth outlook.
Soaring inflation figures for the US in January have bolstered the US Dollar and subdued GBP/USD, with the pairing trading at $1.3557 at the time of writing.
Pound (GBP) Edges Higher on Mixed GDP Data
The Pound (GBP) has broadly received support from UK GDP growth data released this morning.
The UK economy grew by 7.5% during 2021, the fastest rate since the 1940s as it rebounded from the plunge during the pandemic.
A better-than-expected reading for December has also supported Sterling. Growth contracted -0.2% in the last month of last year as the Omicron variant hit the UK, but it is much better than the -0.6% contraction expected.
Darren Morgan, director of Economic Statistics at the Office for National Statistics (ONS), explained:
“GDP fell back slightly in December as the Omicron wave hit retail and hospitality seeing the biggest impacts. However, these were partially offset by increases in the Test and Trace service and vaccination programmes.”
Despite slightly missing forecast, fourth quarter growth came in at 1% and suggested the UK economy weathered the impact of Omicron.
However, concerns over the UK’s economic growth outlook continue to weigh on Sterling sentiment. The looming cost-of-living crisis, tax increases in April, and soaring inflation threaten to slow UK growth in 2022.
Stagflation – slowing growth and rising inflation – remains a risk. Paul Dales of Capital Economics commented:
“When combined with the CPI inflation rate of 5.4%, the 0.2% m/m fall in GDP in December meant that the economy experienced a taste of stagflation at the end of last year.
“As it was driven by the Omicron Covid-19 wave which has now faded, the fall in GDP will soon be reversed. But high inflation will be with us for longer and, together with the rise in taxes in April, will restrain GDP growth this year.”
UK economic activity in the fourth quarter of 2021 was also 0.4% lower than in the final three months of 2019, shortly before the pandemic hit.
US Dollar (USD) Bolstered by 40-Year High Inflation
Following the release of US consumer price index data yesterday that revealed inflation hit a 40-year high of 7.5% in January, the US Dollar (USD) has strengthened.
Another above forecast inflation reading pushed 10-year US Treasury yields to 2% for the first time since August 2019, which bolstered the US Dollar.
News of the jump in inflation has increased expectations that the Federal Reserve will opt for a larger rate hike of 50 basis points in March, instead of the 25 previously anticipated.
In an interview with Bloomberg News, St. Louis Federal Reserve Bank President James Bullard fuelled the speculation after he said he would “like to see 100 basis points in the bag by July 1”.
Bullard added he would support a 50 basis points rise in March.
Meanwhile, tensions over the threat of a conflict in Ukraine continue to weigh on market sentiment, with US President Joe Biden advising US citizens to leave the country immediately in anticipation of military action by Russia.
Pound US Dollar Forecast: GBP/USD to Remain in Tight Range?
The Pound US Dollar exchange rate looks set to remain in a narrow range at the end of the week as a more cautious market mood underpins support for the safe-haven US Dollar.
US consumer sentiment data for February released this afternoon may keep market mood downbeat, with forecasts pointing to morale remaining near an 11-year low.
Ahead of UK employment data released next Tuesday, the Pound may lack significant drivers of movement as the police investigation into Downing Street lockdown breaches look set to take more time before announcing its findings.
Wage growth data released alongside UK jobs data may dent the Pound next week as forecast point to another slowdown in pay, likely increasing concerns over a the UK household income squeeze.