The Pound US Dollar (GBP/USD) exchange rate rallied last week, with the Federal Reserve’s dovish pivot sinking USD.
What’s Been Happening: Risk Appetite Drives GBP
The Pound US Dollar exchange rate began turbulently, before the Fed struck a dovish tone and sent the US Dollar spiralling.
Initially, Sterling was wounded by the Confederation of British Industry (CBI) trade data coming in far below forecast. Further weakening the Pound was the latest consumer credit data from the Bank of England (BoE), which stoked recession fears.
However, a surprising dovish pivot from Fed Chair Jerome Powell set GBP soaring, as US rate hike bets began to dissipate. The disparity between the BoE and Fed began to narrow, and traders moved to support the increasingly risk-sensitive Pound.
Meanwhile, the US Dollar began the week on a stronger note, as risk-averse trade prompted flows to the safe-haven currency. However, USD began to waver as hawkish rhetoric from Fed officials was met with skepticism in the face of cooling inflation.
The US Dollar did avoid a total rout, with stronger-than-expected non farm payroll data showing a healthy labour market. This in turn prompted hopes for further aggressive tightening, despite Powell’s dovish speech.
Three Things to Watch Out for This Week
- US Non-manufacturing PMI
Printing later today, the latest non-manufacturing PMI for the US is expected to show a slowdown. If true, this may show a slowing economy and erase rate hike bets, thus weakening USD.
- US PPI Data
Friday brings the latest PPI data for the US. If the data continues to show signs of inflation cooling, the ‘Greenback’ may weaken.
- UK Domestic Headlines
Due to a lack of data, the Pound may trade on domestic news. With the Northern Ireland Protocol in focus, a solution may buoy Sterling.
Pound US Dollar Outlook
The GBP/USD exchange rate may trade widely this week, with little data leading GBP to trade on domestic news. Positivity around Brexit issues may boost GBP, but if the US data releases print as forecast, USD could weaken.