Pound US Dollar (GBP/USD) Exchange Rate Rallies Despite Shock Contraction in UK GDP
The Pound US Dollar (GBP/USD) exchange rate is strengthening this morning, despite an unexpected slump in UK GDP data in August.
At the time of writing, the GBP/USD exchange rate is trading at roughly US$1.1034, a leap of around 0.6% from the morning’s opening rate.
Pound (GBP) Soars Despite Downbeat Economic Data Releases
The Pound (GBP) is rallying this morning across all major peers, despite a downbeat economic data release.
Earlier today saw August’s GDP figures released. The release showed a shock contraction in economic growth, versus the forecasts GDP would only stall. Weakness in the service sector contributed to the UK’s continuing slide towards recession.
Samuel Tombs, the Chief UK economist at Pantheon Macroeconomics, expanded on this:
‘August’s drop in GDP likely marks the start of a downward trend that will continue deep into next year. The drop was driven by a 1.8% month-to-month fall in output in consumer-facing services sectors, reflecting the intense real income squeeze on households.’
Bank of England Governor Andrew Bailey added to GBP’s turbulence, with comments on Tuesday evening which reaffirmed the end of the BoE’s emergency intervention plan on Friday.
Yet, rumours persist that the BoE will continue to intervene should volatility persist, which appear to support Sterling this morning.
US Dollar (USD) Fades as US Treasury Yields Continue to Decline
The US Dollar is trending lower today as US Treasury yields continue to decline, and investors suggest the currency may have drifted into overbought territory.
While the decline in Treasury yields provides comfort to riskier markets, investors are continuing to reassess what the future holds for US fiscal policy.
The ‘Greenback’ is beholden to today’s upcoming FOMC minutes, with investors anticipating they will confirm the Federal Reserve’s desire to continue increasing interest rates to combat US inflation.
Federal Reserve Bank of Cleveland President Loretta Mester expanded upon this in a speech yesterday:
‘Given the current level of inflation, its broad-based nature, and its persistence, I believe monetary policy will need to become more restrictive in order to put inflation on a sustainable downward path to 2%.’
Pound US Dollar (GBP/USD) Exchange Rate Forecast: Will US Headline Inflation Buoy USD?
Looking ahead this week, Thursday will see the release of the US consumer price index. Investors forecast September’s CPI release will report inflation slowed from 8.3% to 8.1%.
However, could another stronger-than-expected inflation release reinforce Fed rate hike bets and propel the US Dollar higher?
For the UK, data for the rest of the week remains scarce. As such, the Pound will be predominantly affected by domestic news, with a key focus on political turbulence and the Bank of England’s intervention plan.
Should the BoE’s measures end on Friday, GBP may fall, while an extension of the bank’s support may buoy Sterling.