The Pound US Dollar (GBP/USD) exchange rate traded erratically throughout the week amid relentless domestic headwinds for Sterling and softening US inflation.
What’s Been Happening: GBP/USD Wavers amid Tumbling US Inflation
The US Dollar started the week slowly as an improving market mood sapped demand for the safe-haven ‘Greenback’. Tempered rate hike expectations also weighed on the US Dollar ahead of key inflation data.
In midweek trade both investors and the market turned cautious. Inflation softened for the sixth consecutive month and the US Dollar initially plummeted. Inflation fell from 7.1% to 6.5%, its lowest level since October 2021.
The ‘Greenback’ recovered some of these losses at the end of the week, despite a dovish turn from the Federal Reserve. Several speakers expect smaller rate hikes going forward as ‘eye-popping’ inflation is over.
Meanwhile, the Pound opened last week on the back foot as a lack of economic data left it exposed to domestic issues. Relentless industrial action and a downbeat outlook for 2023 weighed on Sterling sentiment.
Further undermining GBP exchange rates was the news that the UK government will scale back their energy support for businesses. Industry bosses warned firms could fold once support ends in April.
A better-than-expected UK GDP print strengthened the Pound at the end of week as the economy grew 0.1% against an expected 0.2% contraction in November.
Three Things to Watch Out for This Week
- UK Inflation
UK inflation is forecast to have fallen modestly in December. Will this drop help to relieve recession fears and lift the Pound?
- UK Wage Growth
An expected uptick in UK wage growth may bolster Bank of England (BoE) rate hike expectations and strengthen Sterling.
- Retail Sales
An expected rise in UK sales, but a predicted fall in US retail sales could also underpin the GBP/USD exchange rate this week.
Pound US Dollar Forecast
Elsewhere, market sentiment could further dictate movement. Developments in China and Ukraine could weigh heavy. Domestic woes could continue to keep a firm lid on Sterling.