The Pound US Dollar (GBP/USD) exchange rate saw turbulent trade last week, as domestic headwinds were unwound by surprise growth in the UK economy.
What’s Been Happening: GBP Recovers as UK Economy Expands
Initially, the Pound (GBP) began weakly, as Brexit optimism began to wane. Oil giant Shell stated the US was a more attractive investment prospect than the UK, worrying GBP investors.
Into Tuesday, downbeat news from the British Retail Consortium (BRC) kept GBP low.
Dovish rhetoric from Bank of England (BoE) policymaker Swati Dhingra added midweek pressures. Investors noted a possible divergence between the hawkish Federal Reserve and European Central Bank (ECB) versus the BoE.
However, readjustments on Thursday began an initial rally, which was then cemented by Friday’s GDP data. With the UK economy growing by 0.3%, GBP investors were cheered by the optimism and Sterling was able to recover.
Meanwhile, the US Dollar soared on Tuesday, as Fed Chair Jerome Powell began his testimony to the US Congress. Powell opened the door to the potential for faster rate hikes, prompting increased tightening bets.
However, signals that the US labour market could be cooling dented USD. An increase in jobless claims and a shock slowdown in wage growth brought the ‘Greenback’ to its knees as the week ended.
Three Things to Watch Out for This Week
- US Inflation
Tuesday brings the latest US CPI data. Could sticky core inflation spark further rate hike bets and lift USD?
- UK Budget
On Wednesday, Chancellor Jeremy Hunt will outline his spring budget. The Office of Budget Responsibility (OBR) will also publish their growth forecasts for the next five years. Could upbeat forecasts buoy GBP?
- UK Employment
The latest UK’s employment data is due to print on Tuesday. The jobless rate is expected to tick up to 3.8% while wage growth is forecast to slow, which could weaken Sterling.
GBP/USD Outlook
The GBP/USD exchange rate could see further volatility this week, as the fallout from Silicon Valley Bank’s collapse continues to reverberate. Economists have begun to question the likelihood of further tightening, which could weigh heavily on USD.