The Pound US Dollar (GBP/USD) exchange rate fluctuated last week, as optimistic forecasts lent some support to Sterling.
What’s Been Happening: GBP Fluctuates amid UK Economic Optimism
Trade in the Pound (GBP) was mixed last week, as domestic headwinds did battle with optimistic economic forecasts.
Initially, a hawkish speech from Bank of England (BoE) policymaker Catherine Mann brought cheer to GBP investors. She reiterated her view that further interest rate hikes were necessary. However, industrial action may have capped GBP’s gains.
In mid-week trade, The National Institute for Economic and Social Research (NIESR) stated that the UK may sidestep a recession in 2023. As such, optimism among investors began to buoy the Pound. Friday’s news that the UK had avoided a recession in Q4 then lent more support. However, the yearly and monthly GDP data painted a more sombre picture, leaving Sterling to waver.
Meanwhile, the US Dollar (USD) mostly traded on a mix of rate hike bets and market sentiment. Initial concerns of increased Sino-American tensions saw the safe-haven ‘Greenback’ strengthen. However, a dovish speech from Federal Reserve Chair Jerome Powell knocked it back.
Strong unemployment data and consumer sentiment optimism saw USD gain strength, but a persistently bullish market mood kept its gains capped.
Three Things to Watch out for This Week
- US Inflation
The US consumer price index for January is forecast to print at 6.2% on Tuesday. This could dent USD, as another drop in inflation may undermine Fed rate hike bets.
- UK Inflation
Inflation data for the UK is due to print on Wednesday. While a cooling is expected to 10.2%, with CPI remaining far beyond the BoE’s 2% target, a need for further tightening could boost GBP.
- UK Unemployment Data
Tuesday brings the unemployment rate for December, alongside wage growth data. Unemployment is forecast to remain as it is, while average earnings may tick down, which may dent GBP.
Pound US Dollar (GBP/USD) Outlook
GBP/USD may trade in a wide range over the coming week, care of the latest CPI data for both sides of the pairing. Central bank reaction is likely to be the key driver of movement: if the BoE takes a hawkish stance, GBP could rally.