The Pound US Dollar (GBP/USD) exchange rate ticked upward last week, as high inflation reaffirmed expectations for higher interest rate hikes from the Bank of England (BoE).
What’s Been Happening: GBP Supported by Investor Hopes for Higher Rate Hikes
The Pound (GBP) began the week quietly, as a lack of macroeconomic data left Sterling vulnerable to domestic headlines. Recession fears continued to amplify over the course of the week, capping potential gains for GBP.
Tuesday’s hotter-than-expected wage growth data for November prompted an upside for GBP, as earnings grew more than expected. As such, pressure was exerted on the Bank of England to continue tightening.
Core inflation remained steady in December, prompting further gains on Wednesday as pressure continued to mount on the BoE. However, a sharp fall in December’s retail sales saw the Pound trim its gains but still close higher against the US Dollar (USD).
Meanwhile, the US Dollar traded quietly over the week, due to a varying market mood which capped the safe-haven currency.
Mixed signals from Federal Reserve officials kept the ‘Greenback’ in flux, but a better-than-forecast fall in jobless claims brought gains. With a tight labour market being a key driver of inflation, investors saw room for further tightening from the Fed.
Three Things to Watch Out for This Week
- UK PMIs
Tuesday brings the flash PMIs for the UK’s manufacturing and service sectors, with January expected to be another month of contraction. If these print as forecast, GBP may weaken.
- US PMIs
Similarly, PMIs for the US manufacturing and service sectors are due to show contractions in January. This may weaken the ‘Greenback’.
- US Core PCE Price Index
The Federal Reserve’s preferred gauge of inflation is due to print on Friday. An expected fall could weaken USD.
Pound US Dollar (GBP/USD) Outlook
The Pound US Dollar exchange rate could fall this week, as recession anxieties continue to bear down on Sterling. With the UK private sector forecast to contract in January, hopes for further tightening from the BoE may dissipate.