Pound US Dollar (GBP/USD) Exchange Rate Slides despite US Inflation Release
The Pound US Dollar (GBP/USD) exchange rate plunged to a 10-day low at the end of last week, having peaked initially as US inflation fell to its lowest level in 2 years. Subsequently weighing upon the Pound (GBP), however, were dovish comments from Bank of England (BoE) Governor Andrew Bailey.
At the time of writing, GBP/USD is trading at $1.2447, extending Friday’s downslide.
US Dollar (USD) Battered by Unexpectedly Low Inflation
The US Dollar (USD) experienced mixed trading dynamics this past week, plummeting on Wednesday as headline inflation fell unexpectedly to 4.9%.
Monday saw little movement in the Pound US Dollar exchange rate as UK markets were closed on account of the King’s coronation. On Tuesday, USD experienced headwinds in the form of bearish interest rate bets for the Federal Reserve bank and a congressional stand-off over the US’ debt ceiling.
The prospect of a default triggered market jitters: ultimately, however, this benefitted the US Dollar on account of its safe-haven status.
The publication of Wednesday’s headline inflation data increased the likelihood of central bank policy divergence as pressure on the Fed increased to cease hiking interest rates. ‘Greenback’ appeal waned as investors considered the repercussions of a dovish central bank.
Despite the disappointing release, USD managed to recover some of its losses later in the week, as a bearish market mood recouped support for the currency. In a speech on Friday, a pair of US central bankers said the Fed is getting interest rates closer to where they need to be, but Governor Michelle Bowman observed:
‘Should inflation remain high and the labor market remain tight, additional monetary policy tightening will likely be appropriate to attain a sufficiently restrictive stance of monetary policy to lower inflation over time.’
Pound (GBP) Wobbles on Mixed BoE Feedback
The Pound began the week on optimistic footing, climbing on Tuesday amid bullish rate hike bets for the Bank of England and further buoyed by April’s sales monitor from the British Retail Consortium (BRC).
The BRC reported that retail sales in the United Kingdom rose 5.2% compared with April 2022; capping additional tailwinds though, analysts remarked that due to higher levels of inflation, consumers were getting less for their money.
Midweek, a lack of significant UK data left the Pound to waver directionless against its peers – and the following day, last-minute nerves kept GBP investors from placing any bullish bets. Subsequently, the BoE raised interest rates by 25bps as expected.
In addition to the hike, mixed comments from governor Andrew Bailey inspired initial tailwinds before putting a dampener on Sterling sentiment. While Bailey confirmed that evidence of more persistent pressures would require further monetary policy tightening, he later remarked:
‘We are approaching the point when we should be able to … rest in terms of the level of rates.’
On Friday, Sterling traded in a mixed range against various peers, as the UK’s latest economic data printed mixed. Britain’s economy expanded as expected in the first quarter of 2023, but a contraction in March’s GDP sparked some concern despite economists’ predictions that the country would avoid a recession.
GBP/USD Exchange Rate Forecast: Employment and Retail Data in the Spotlight?
This Pound US Dollar exchange rate is likely to be affected next week by fresh data releases including Tuesday’s UK employment data and sales figures from the US. A drop in jobless claims could boost GBP morale, potentially buoying GBP/USD; on the other hand, rising sales in the US could inspire tailwinds in the ‘Greenback’.
Later in the week, a fall in US benefits claimants may lend further support to the US Dollar. The exchange rate might also take direction from central bank developments, with dovish comments from either the BoE or the Fed weighing upon the corresponding currency.