Pound US Dollar (GBP/USD) Exchange Rate Pressured by Hawkish Fed
The Pound US Dollar (GBP/USD) exchange rate ended last week’s session little changed from its opening levels, as headwinds and tailwinds affected both the Pound (GBP) and the US Dollar (USD) intermittently. While hawkish Fedspeak initially lent the ‘Greenback’ some support, easing inflationary pressures in the United States and a risk-on market mood capped USD gains and buoyed GBP/USD.
At the time of writing, GBP/USD is trading at $1.2693, having trended broadly lower Sunday-to-Sunday.
US Dollar (USD) Enjoys Initial Uptrend on Bold Fedspeak
The US Dollar faced mixed trading stimuli last week, but enjoyed prolonged tailwinds against the Pound Wednesday through Friday as hawkish rhetoric from the Federal Reserve boosted USD morale.
At the start of the weekly session, USD/GBP traded sideways amid disappointing data from both the UK and the United States. USD investors, concerned over the Fed’s interest rate hike trajectory, were unimpressed by a better-than-expected monthly manufacturing index, as it demonstrated an ongoing deterioration in business conditions.
Tuesday saw the exchange rate continue to trade sideways, despite an improvement in May’s durable goods orders. US Treasury bond yields rose, but traders were cautious of placing bullish bets.
Midweek, USD/GBP climbed steeply as Fed Chairman Jerome Powell confirmed at least two more interest rate hikes ahead at the European Central Bank (ECB) Forum on Central Banking.
Powell told the forum: ‘Policy hasn’t been restrictive enough for long enough… I wouldn’t take moving in consecutive meetings off the table at all.’
Tailwinds for the ‘Greenback’ extended into Thursday as initial jobless claims fell and the final reading of Q1’s GDP growth rate exceeded expectations. The currency dropped against its peers on Friday, however, following the release of May’s PCE price index.
The Fed’s preferred measure of inflation cooled to 4.6% unexpectedly, minimising the likelihood of ongoing hawkishness from the US central bank.
Pound (GBP) Morale Deteriorates despite Hawkish BoE
The Pound tumbled against most of its peers last week despite hawkish commentary from the Bank of England (BoE), as fears of an impending recession weighed upon the currency.
On Monday, the Confederation of British Industry (CBI)’s distributive trades survey for June printed below expectations, exacerbating existing Sterling headwinds. Morale remained bearish on Tuesday amid a lack of significant UK data, although emerging risk-on sentiment helped cap GBP losses.
Midweek, hawkish speeches from BoE officials failed to boost the Pound further, as fears of a recession persisted; reassurances from Governor Andrew Bailey that the British economy was resilient were disregarded.
On Thursday, GBP came under further pressure from rising UK mortgage rates and the prospect of widespread turmoil in the country’s water utility sector. Economists feared that a potential bailout of England’s largest water company, Thames Water, could push public finances to breaking point.
The currency managed to recoup some of its losses at the end of the week, however, as finalised Q1 GDP data confirmed that the UK had avoided a winter recession. Nevertheless, the news does not rule out economic turmoil ahead.
Thomas Pugh, economist at RSM UK, captured market’s fears, remarking: ‘The big picture is that the economy could be no larger in 2024 than it was pre-pandemic.’
GBP/USD Exchange Rate Forecast: US Data Dominates the Docket
The Pound US Dollar exchange rate is likely to trade predominantly on US data this coming week, given the lack of key UK releases.
If manufacturing activity improved in the States according to the Institute for Supply Management (ISM)’s June PMI, the ‘Greenback’ could firm. Subsequently, the publication of the latest meeting minutes from the Federal Open Market Committee (FOMC) could likewise boost the currency.
Later in the week, an increase in initial jobless claims may temper USD gains, although rising service-sector activity is likely to inspire further tailwinds. Unemployment is expected to remain unchanged; other factors which may influence GBP/USD include political dynamics and ongoing recession worries in the UK.