The Pound US Dollar (GBP/USD) exchange rate traded widely last week, with both central banks taking different stances on monetary tightening.
What’s Been Happening: US Dollar Seesaws as Fed Promises Further Tightening
The US Dollar (USD) began the week muted, with thin trading conditions and the Federal Reserve still on blackout. However, US inflation cooled more than expected in November, which sank the ‘Greenback’ on Tuesday.
The US Dollar quickly found its feet again in the wake of the Fed’s latest policy meeting. While the Fed slowed the pace of its rate hikes, Fed Chair Jerome Powell signalled that rates will peak higher than previously forecast in 2023.
Expectations for higher interest rates stoked global recession fears on Thursday. The resulting safe-haven flows bolstering the ‘Greenback’. While Friday’s private sector PMI indexes showed further contractions, the risk-averse market mood cushioned USD against substantial losses.
Meanwhile, the Pound (GBP) began the week with little support, with a positive GDP reading countered by bleak economic news.
Further adding to GBP’s woes was a dovish split among the Bank of England’s (BoE) Monetary Policy Committee (MPC). With GBP investors rethinking the potential for future rate hikes, sentiment waned against Sterling through to the week’s close.
Three Things to Watch Out for This Week
- US Core PCE Price Index
Printing on Friday is the Federal Reserve’s preferred gauge of inflation. A fall is expected, which may damage USD as inflation continues to show signs of cooling.
- UK CBI Releases
This morning and Wednesday brings the latest data from the UK’s Confederation of British Industry (CBI). Industrial trends and distributive trades are both forecast to show falls, which could weigh on Sterling.
- Final GDP Releases
Thursday brings the final GDP prints for both sides of the pairing. With the UK’s GDP expected to confirm a contraction, Sterling could weaken further.
Pound US Dollar (GBP/USD) Outlook
The Pound US Dollar exchange rate could weaken this week, with thin trading conditions shifting investor focus to UK headlines. However, a fall in the US’ core PCE price index may strengthen GBP/USD, by reducing investor expectations for further tightening.