Pound US Dollar (GBP/USD) Exchange Rate Firms as Fed Forecasts Dent USD
The Pound US Dollar (GBP/USD) exchange rate trended up last week as fears of central bank policy divergence weighed upon the US Dollar (USD). Meanwhile, bullish Pound (GBP) sentiment sustained tailwinds for the UK currency.
At the time of writing, GBP/EUR is trading at $1.2575, having firmed by 0.96% in the past 7 days.
US Dollar (USD) Slides on Fed Uncertainty
The US Dollar sank against the majority of its peers last week as bearish forecasts for the Federal Reserve depressed ‘Greenback’ investors.
The start of the week saw the currency make initial gains amid risk-off sentiment; but USD subsequently came under pressure as the US ISM services PMI for May printed below expectations.
Into Tuesday, USD climbed in the morning, before sinking once more on a disappointing economic sentiment release. Sentiment improved by 0.1 in June, rather than by 3.6 as forecast.
The US Dollar firmed again overnight, slid lower during Wednesday’s European morning, then spiked following an unexpected interest rate hike from the Bank of Canada (BoC). Given the proximity of the two economies, investors hoped a hawkish BoC may prompt the Fed to follow suit.
Nevertheless, such hopes waned amid bearish comments from economists. On Thursday, Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING, remarked:
‘For the near term, it looks like the dollar can hold the majority of its recent gains into next Wednesday’s FOMC meeting.’
At the end of the week, the ‘Greenback’ remained subdued. While US Treasury bond yields attempted an initial recovery, traders appeared hesitant of placing bullish bets.
Pound (GBP) Tailwinds Sustained by Bullish BoE Forecasts
The Pound experienced a brief slump at the start of the week, undermined by mixed market sentiment: subsequently, however, May’s finalised services PMI printed marginally higher than originally expected, boosting the currency.
On Tuesday, weak retail data from the British Retail Consortium (BRC) triggered another dip for GBP/USD. Falling below estimates of 5.2%, the release showed sales growth of 3.7% in the year to May 2023.
Esme Harwood, a director at Barclays, said: ‘Consumers are still paying close attention to their everyday spending, and we are seeing growing concerns around shrinkflation in the weekly shop.’
Sterling recouped some of its losses in the afternoon and overnight, before spiking to a 5-day high on Wednesday amid bullish expectations for the Bank of England. Subsequently, strength in the US Dollar dragged the exchange rate back down to earlier levels.
On Thursday, GBP climbed higher still, strengthened by economists’ comments regarding the BoE. Compared with the Fed, the BoE has a higher likelihood of hiking interest rates at its next meeting.
At the end of the week, Sterling hit a 1-month high against the ‘Greenback’, sustained by bullish momentum. While business advisory firm BDO showed that retail sales declined by 1.5% in May for the first time in over two years, GBP/USD managed to overcome headwinds.
GBP/USD Exchange Rate: Fed Decision at the Fore
Into this week, the Pound US Dollar exchange rate will likely revolve around the Federal Reserve’s interest rate decision.
Economists currently predict that the Fed will keep interest rates on hold, which could dent USD exchange rates given recent hikes from the BoC and Bank of England. Meanwhile, the Pound may is expected to trade on employment data and GDP.
The British economy is forecast to have lost 20 thousand jobs in March, potentially inspiring headwinds if this is taken as a sign that businesses cannot afford to retain staff. Nevertheless, a monthly increase in UK GDP could reverse Sterling losses, supporting an extension of the GBP/USD uptrend.