Pound US Dollar (GBP/USD) Exchange Rate Slumps amid Signs of Tight US Labour Market

Pound US Dollar (GBP/USD) Exchange Rate Falls after Drop to US Jobless Claims

(Updated 16:38 18/08/22)

The Pound US Dollar (GBP/USD) exchange rate slumped over the course of the day. A retreat in risk appetite may have seen additional risk-off flows directed toward the safe-haven ‘Greenback’, pushing the currency pair lower.

The release of the latest initial jobless claims may have also prompted losses in GBP/USD today. Claims fell to 250,000 which may have prompted investors to increase bets on interest rate hikes from the Federal Reserve amid signs of a tight labour market.

At time of writing the GBP/USD exchange rate is at around $1.994, which is down roughly 0.4% from this morning’s opening figures.

Original article continues below:

Pound US Dollar (GBP/USD) Exchange Rate Rangebound amid Rate Hike Bets

The Pound US Dollar (GBP/USD) exchange rate is trading in a narrow range today. Any upward movement for GBP/USD may be restricted due to fears of a UK recession after fresh inflation highs.

On the other hand, a dovish tone in Wednesday’s FOMC minutes as well as BoE rate hike bets may be underpinning the pair.

At time of writing the GBP/USD exchange rate is at around $1.2050, virtually unchanged from this morning’s figures.

US Dollar (USD) Firms as Currency Benefits from Risk-Off Flows

The US Dollar (USD) is trending higher today amid a risk-off market mood. Fears of a global economic slowdown could be lending support to the safe-haven ‘Greenback.

Additionally, expectations of further policy tightening from the Federal Reserve may be underpinning the currency today.

The latest FOMC minutes on Wednesday provided extra evidence of the Fed’s commitment to further interest rate hikes. The minutes indicated that Fed officials saw ‘little evidence’ that inflationary pressures were easing.

A dovish tone undercut the minutes however and is potentially capping gains for the US Dollar today. The document outlined the Fed’s expectations that policy changes would need to move to a ‘restrictive stance’.

Bob Miller of BlackRock felt that this tone reflected warranted caution on the Fed’s part:

‘The intended message was much more nuanced” and reflected a need to “optionality” by a central bank trying to assess conflicting economic data and shocks.’

Pound (GBP) Edges Higher as Markets Predict 0.5% BoE Rate Hike

The Pound (GBP) is making limited gains against its peers today. After inflation hit double digits on Wednesday, expectations of further interest rate hikes from the BoE could be helping GBP to climb. An uptick in bond yields may also be bolstering the Pound today.

Inflation in July leaped to 10.1% from 9.4% in June, the UK’s highest since February 1982. Markets are now pricing in a 0.5% interest rate hike from the BoE at its September meeting.

Silvia Dall’Angelo, senior economist at investment bank Federated Hermes, said:

‘Today’s inflation upside surprise, coming on the heels of a strong labour market report yesterday is likely to prompt another 50bp rate hike by the Bank of England at its next policy meeting.’

On the other hand, the figures may also be keeping the Pound subdued today. Investors remain concerned that the country could be edging ever-closer to a recession.

GBP/USD Exchange Rate Forecast: Will Fed Speeches Contradict Dovish Minutes?

Looking to the rest of the week for Sterling, a forecast drop in July’s retail sales figures on Friday could pull the currency lower if they print as forecast. The drop would represent the third consecutive month of losses for the sector.

The UK’s cost-of-living crisis could also weigh on the currency this week. With inflation running at a 40-year high the impact on household budgets could be severe.

For the US Dollar, an uptick in initial jobless claims later today could see the currency slip if they print as forecast. Investors may view the data as signs of a cooling labour market.

On the other hand, speeches from Fed policymakers Esther George and Neel Kashkari could limit losses if they bolster expectations of further rate hikes.

Additionally, Friday’s speech from the Fed’s Tom Barkin may also help to assuage market concerns after the more cautious FOMC minutes.

Gareth Monk

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