Pound US Dollar (GBP/USD) Exchange Rate Firms as UK Data Impresses
The Pound US Dollar (GBP/USD) exchange rate rose at the start of today’s European session, as UK employment data exceeded expectations. Subsequently, US inflation missed forecasts, dampening hopes for an upcoming hike from the Federal Reserve.
At the time of writing, GBP/EUR is trading at $1.2617, having risen by more than 0.8% over the course of the day.
Pound (GBP) Climbs on UK Jobs Data
The Pound (GBP) enjoyed an uptick this morning following better-than-expected employment data from the Office for National Statistics (ONS).
Unemployment fell in April, rather than rising as expected; furthermore, average earnings increased and the economy added 250 thousand jobs rather than 162 thousand as forecast. Economists at ING bank said of the release:
‘Faster-than-expected wage growth points to a rate hike in June and potentially August… That doesn’t necessarily suggest the Bank of England needs to raise rates as aggressively as markets expect, but it does imply that rate cuts are some way off.’
The likelihood of further monetary policy tightening from the Bank of England (BoE) cheered GBP investors – but while Sterling climbed, tailwinds were tempered by fear of a recession. Hussain Mehdi, macro and investment strategist at HSBC Asset Management, warned:
‘With the possibility of higher-for-longer rates, a UK recession looks unavoidable as tight monetary policy filters into the real economy – including the housing market.’
Moreover, industry experts cautioned that the effects of long-term sickness preventing people from working presents a concern for the labour market.
US Dollar (USD) Depressed by US Inflation Data
The US Dollar (USD) weakened against its peers today as inflation data from the United States printed at 4% for the year to May 2023 – down from 4.9% the month prior and below the 4.1% expected. Today’s reading marks the lowest rate of US inflation since April 2021.
The implication is that the Federal Reserve Bank will be less likely to hike interest rates this week or even at its next meeting: an outcome many already expected but which is disappointing for investors nevertheless.
Ahead of today’s data, Fed Chairman Jerome Powell remarked:
‘Having come this far, we can afford to look at the data and the evolving outlook and make careful assessments… We face uncertainty about the lagged effects of our tightening so far.’
Despite the drop in headline inflation, however, the central bank’s task is complicated by persistent core inflationary pressures. According to reporters, Fed officials said even if they pause rate hikes this time around, further increases could occur at later meetings.
Such comments failed to boost the ‘Greenback’ materially; at approximately 2pm GMT, inflation related headwinds elevated the Pound US Dollar exchange rate above $1.26 for the first time since 11th May.
GBP/USD Exchange Rate Forecast: Fed Decision in the Spotlight
Into tomorrow, GBP/USD is likely to trade almost exclusively on the outcome of the Federal Reserve’s interest rate decision. Ahead of the event, the ‘Greenback’ will likely be muted against the Pound and its other peers, with USD investors holding off placing bets; if the Fed subsequently keeps interest rates on hold, the exchange rate may climb on US Dollar headwinds.
On the other hand, a hold in interest rates may be priced in already, in which case GBP/USD could see limited movement. Elsewhere, if the UK economy expanded in April, Sterling may enjoy a boost against its rivals.